What’s wrong with debt

Is debt important? Does it really matter how much we owe and whether or not we can pay it back? Some readers have suggested recently, and they aren’t alone, that a preoccupation on debt and deficits is a rightwing distraction—that we have obligations to spend money today—whether or not we have that money. Even if that means we have to borrow more to spend it.

It isn’t an academic debate—Ontario’s debt has ballooned over the past decade. Ontario now owes more than Portugal. The province pays nearly as much in debt payments ($10 billion) each year as Greece ($12 billion). Someone must pay this debt—it is either you or your children.

Some economists argue, however, that fixating on debt risks weakening the fragile economic recovery. That at times of recession governments must kickstart economic growth—that when dollars begin flowing again the rest of us will join in. Once the economy is purring again governments repay the money they borrowed. That has been the working theory—though imperfectly practiced—through most of the last 80 years.

Others urge us to relax about our growing public debt burden because, when the economy begins to turn over again, growth will resume and our economic engine is robust enough to burn away that debt in short order.

But what if they are wrong? What if their assumptions and reading of history are mistaken?

Robert Gordon is an expert on productivity at Northwestern University. In a recent paper he challenges the notion that economies grow indefinitely. In fact through most of history there has been very little measurable growth in output per person, according to Gordon. But somewhere in the mid-1800s things began to change. Output per person began to grow in productive economies. About the turn of the century the pace of growth accelerated. This growth spurt reached its peak in the decades after the Second World War. Since then, the rate of output growth has decelerated fairly steadily. Gordon argues that the pace of output growth per person could slow to a stop in the next century.

He notes that most of the meaningful advances that have spurred productivity growth have already occurred: clean running water; the internal combustion engine; electricity; communications; and air travel. He suggests the impact of these changes developed in the first half of the last century drove output growth much more than anything in the second half of the century.

Consider this: Would you trade anything invented since 1970 for indoor plumbing? Electric lights? Air travel? While we have continued to innovate and make improvements, the impact of the changes over the last 50 years has been much less profound in terms of output per person than those of the previous 50 years.

The bottom line is that without productivity improvement, an economy cannot grow.

So what does this mean? What if we can’t rely on growth to help us pay down our debts?

We already spend more in this province paying down our debt than we do to fund all but two government ministries—health and education. As interest rates rise, our debt servicing costs will soar even further. That means fewer dollars for social programs and income distribution. Fewer dollars for schools and hospitals. Debt robs us of choice.

Somehow over the past 40 years we seem to have lost track of debt as a real and tangible obligation. Instead it has become a concept— something that can change shape and dimension— affected by factors we don’t fully understand, but trust that others do.

In the absence of economic growth, however, this illusion is shattered. Without growth the spectre of debt is no longer a fuzzy concept but becomes crushingly real and personal. Doors are closed. Opportunities dashed. Options diminished.

It is then it occurs to us that debt can no longer be ignored or left to others to worry about. We must then face three sober choices: accept our share of the burden despite our diminished capacity to pay it back; pass along a portion of it to our children and future generations; or refuse to pay it.

All three will have a profound impact on the way we live and the community around us. Many of us will have to learn to live with less. It is then that debts stops being an idea—they take on real weight and exact a real toll in people’s lives.

Without growth, the enormous debt we have accumulated in this province can’t be shrugged off. Someone must pay it. It isn’t a concept—it’s gravity.

rick@wellingtontimes.ca