The World Economy Needs More Borrowing?Not Less
The World Economy Needs More Borrowing?Not Less
Fred Block: The World Economy Needs More Borrowing?Not Less
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.-Polonius in Hamlet, Act 1, Scene 3
Shakespeare intended for Polonius?s advice to his son in Hamlet to be comical. Even 400 years ago, the ideal of individual economic self-sufficiency he expressed sounded old-fashioned. Yet Polonius?s moralistic condemnation of borrowing?as subversive of thrift and self-discipline?is still alive today, and it could push the world economy into a catastrophic global depression.
The prevailing view is that an orgy of borrowing by households, governments, and financial institutions is what got us into trouble and that global recovery requires everybody to go on a low-debt diet: Debt is what got us into this mess; more debt couldn?t be the solution. But these disciples of Polonius simply do not understand how economies work. In the U.S. economy and around the world, our current problem is not too much debt but too little.
Yes, we did have an epidemic of reckless borrowing?or, more accurately when it comes to housing, of very stupid lending. But the antidote for foolish debt is not the nostrum of ?no debt?; it is to increase the quantity of smart lending. Smart lending finances real investment?the kind that generates actual returns in future years?and it is the key to economic growth and prosperity. It is this growth that will generate the revenues necessary for individuals, firms, and governments to pay down those debts.
Both in the United States and abroad, the rate of investment today is well below pre-crisis levels. This shortfall is happening even though every nation needs improved transportation and communication infrastructure, more outlays for conservation and clean energy, and increased funding for education and health facilities. These are, moreover, proven smart investments; if planned well, they produce high rates of return.
Infrastructure investments are needed to catalyze higher rates of private sector spending on offices, factories, and equipment. Yet governments aren?t funding these investments at adequate levels because they are under pressure to balance budgets or limit deficits. And banks and other financial institutions can’t do it because they have become extremely risk averse, and because there aren?t mechanisms for directing private capital into this sort of spending.
Moreover, as economies become more advanced, the need for infrastructure spending accelerates. Even as we develop new modes of transportation, for example, we still have to support older ones. We need to build and maintain infrastructure for ocean and river shipping, for ground transit?highways, railroad, and mass transit?for air travel, and even for space transport. We have added wireless and the internet to our communications infrastructure, but on top of older wired networks and broadcasting. And many infrastructure projects, such as bridges and ports, have to be custom-built each time, so they inevitably rise in cost relative to mass-produced products. Similarly, despite all our new computer technologies, education?from pre-kindergarten through the Ph.D.?still requires a lot of classrooms and offices. Building these facilities takes a rising share of GDP.
Fortunately, there are solutions that would help us create more of the smart debt that we need. First, institutions such as the World Bank and big regional investment banks could substantially increase their borrowing in global capital markets to fund needed infrastructure projects around the world. Second, governments could offer loan guarantees and subsidies to public and private entities to encourage stepped up investment. In 2009 and 2010, for example, the U.S. government covered a portion of the interest paid on Build America Bonds, which were issued by states and local governments and financed $180 billion worth of projects. A revival of that program would be highly desirable. Third, we could expand the public-private partnerships through which the private sector can increase its funding of needed infrastructure.
But these measures won?t stand much of a chance until political and economic elites recognize that Polonius?s advice is obsolete. The European Community, unfortunately, has arbitrarily ruled that the consolidated debt of all levels of government within a nation must not exceed 60 percent of GDP. This fails to distinguish between smart debt and stupid debt. It makes especially little sense at a time when infrastructure spending is critical for driving economies forward. Greece, Spain, Italy, and Ireland should be borrowing more to invest wisely in needed infrastructure even if it pushes total borrowing above that arbitrary cap.
If we continue to listen to the advocates of a universal low-debt diet, the current global slowdown will surely deepen, producing even more unemployment and hardship. The way to properly husband our resources is to borrow more and invest productively.
