“Mountains of National Debt – Hysteria and Myth?”
The university department where I did my degree in Management Sciences is now part of the Manchester Business School and the latest “MBS Alumni Relations eNewsletter” features an article entitled “Mountains of National Debt – Hysteria and Myth?”. It is by Professor Michael Luger, Director of Manchester Business School, who asks whether the national debt piling up in the UK and US is as bad as it seems.
“The financial meltdown and subsequent recession of the past two years is clearly a grave matter. Thousands of businesses, big and small, have gone bust. Tens of thousands of workers have lost their jobs. And most recently we have seen the spotlight turn on public sector cuts – so reluctantly acknowledged by Gordon Brown.
Not surprisingly, what has been characterised as the worse economic situation since the Great Depression has fuelled a torrent of media coverage reinforcing the doom and gloom.
Now, if economics is “the dismal science” I am supposed to be a dismal scientist. But, I have found myself over the past year being less pessimistic about the economic state of affairs than most others – particularly when it comes to the hysteria surrounding national debt.
I would suggest that our economies are sound enough to absorb that debt during these hard times, and then start to whittle it away in the future when economies return to growth. We saw that happen in the period after World War II and in the 1990s during the Clinton Administration. Just as public fiscal reserves deplete quickly during recessions, they also have the ability to grow robustly in good times.
Another reason I dismiss the hype about crippling deficits and doomsday debt is that countries like the UK and US have huge offsetting assets that few people talk about. Let’s take a household analogy. Suppose a family with annual income of £50,000 owned a house free and clear that had a market value of £1 million, and had consumer debt of £100,000. Their debt-to-income ratio would be 2:1 (compared to what is 0.7:1 in the U.S. and 0.65:1 in the U.K.).
Would you consider their £100,000 debt to be catastrophic? The rational answer is no because they could get a £100,000 mortgage on their asset that would cost them around £630 a month to service (20 years and 4.5%). That is well affordable. Or, they could sell the asset altogether, pay off the debt in full, and either rent or buy a less expensive home.
Government debt should be viewed through that same lens. No one knows the precise value of public infrastructure in the UK or US. Assuming a conservative multiplier of twice GDP (as measured in Japan), that amounts to some $30 trillion in the US and $5 trillion in the UK. One reason that value is hard to establish is that not all of it has “market value” – i.e. has willing buyers. But much of it does: motorways and bridges have been, or could be, privatised and turned by the new owners into toll roads and bridges.
Public buildings can be sold and converted into private use – as we saw in the 1980s with the former County Hall across the Thames from Parliament. Many countries have sold off national railroads, steel companies, utilities, and more, in part to raise money. And the Tories are now proposing to sell off part of the BBC. So both the US and UK have the capacity to bring down their debts substantially by selling off some of their assets.
A sizable share of the red ink that we see today (whether in debt or commitments) relates to bail-out funds for banks and other critical businesses which are either loans or equity investments that very well will be repaid or, even better, result in nice profits or capital gains for the government.
We already see banks in a headlong rush to give the government back their money, to shed themselves of the additional oversight that came with the bail-out. One of the best financial moves the U.S. government ever made was its agreement with Chrsyler in 1979 to co-sign a $1.5 billion note to help save the company. The note was paid off by 1983 at which time Chrsyler paid the Treasury a $350 million guarantor’s fee.
I am enough of a dismal scientist to admit that there are real threats ahead. The outcomes I forecast will require sustained, intelligent action and stewardship by government, legislators and monetary authorities.
And beyond this recession there is likely to be lower rates of growth than we have seen during the past 60 years because of macro-problems such as mismatches between food and water supplies and burgeoning populations, the depletion of fossil fuels, and the costs of dealing with global warming and terrorism. I am also enough of a believer in the spirit of humankind to maintain hope that we can address these issues and continue to progress.”