Eye on the Pie and Opinion

MARCUS: Debt and taxes are not the devil's doing

February 26, 2011

This national debt business is being overplayed. Critics characterize the debt as a giant burden, our most important national issue. Borrowing for the future, however, makes good sense when the debt contributes to economic growth.

The hitch is understanding the role debt plays in making the economy grow. Debt permits families to invest in housing, businesses in machinery, and governments in education, the environment, transportation and communications. These functions enable economic development and growth. Contrast this with credit card debt. People buy today to enjoy today things and experiences, knowing they will consume somewhat less in the future as they pay back what they borrowed plus interest on that debt.  

As “economic moralists,” you and I condemn people for not saving before buying. We say many people go into debt spending too much on trivial and unnecessary things. Credit card users would say we seek to constrain their economic freedom. They would deny that their purchases are trivial or unnecessary.

Consumer and business debt is different from government debt. Legislators choose to borrow for today, believing their programs will benefit us and our children when, as citizens of the future, we will pay back the debt. However, the decision to borrow is often made to avoid raising taxes.

Americans believed, rightly or wrongly, that fighting in Iraq and Afghanistan without raising taxes benefited the future of our country. Americans believed helping those who lost their homes and jobs in the recent recession, without raising taxes on the wealthiest and most secure members of society, would help the future of the country.  

The big question that no one answers remains: “Will higher taxes lead to a stronger economy?” Most people are so brainwashed they cannot conceive of beneficial effects of higher taxes. When we borrow to spend on health care for children, the future benefits. Borrowing to spend on health care for the elderly generates few future benefits. This does not mean we ignore the elderly. That’s why Medicare, unemployment compensation and other compassionate programs must be placed in a trust fund. Otherwise, today’s practical imperatives might overwhelm our ongoing moral concerns.

Higher taxes today have the moral advantage of accepting responsibility for today’s decisions. We didn’t do that for our current Middle-Eastern wars. Higher taxes on the wealthy have the beneficial effect of redistributing income to those who are less productive because they are poor.

Some observers believe the wealthier members of our society are more creative, productive, innovative and, hence, more valuable than the less-productive poor. Many who are poor, however, are incapacitated by their poverty. Innovation, creativity, even productivity are attributes that co-exist with a reasonable measure of economic security. Hunger and desperation rarely contribute to achievement.

The significant issue persists: How do we help the economy grow? Debt becomes insignificant in a healthy, growing economy. Debt for the right purposes helps the economy grow. Higher taxes on everyone today are also fine if they result in economic growth. Income redistribution through higher taxes on the wealthy also can contribute to economic growth and certainly can be used for our compassionate social goals.

Part of the debt paranoia is that a minor portion of the federal debt is held by people or governments abroad. Nonetheless, nearly 70 percent of the federal debt is owned by U.S. agencies, mutual funds, financial institutions and ordinary citizens. When we repay the principal amount owed and the corresponding interest, we are paying ourselves. The money initially used for investment goes back into circulation. It is neither a loss to the nation nor dead weight on the economy.

It would help if the anti-debt and anti-tax folks had a better understanding of how the world works.•

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Marcus taught economics for more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.
 

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