Economic fallacies: debt

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Following from the recent election, and all of the Tory hyperventilating about public debt, I thought I’d revisit an old post from another place that debunks some economic fallacies.

The University of Newcastle has the excellent Centre of Full Employment and Equity, where William Vickery has an article called “Fifteen Fatal Fallacies Of Financial Fundamentalism” – which should be required reading for progressives.

Note (May 2012): Link now updated.

Here’s a few excerpts:

Fallacy 1:

Deficits are considered to represent sinful profligate spending at the expense of future generations who will be left with a smaller endowment of invested capital. This fallacy seems to stem from a false analogy to borrowing by individuals.

Current reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees, and other charges. This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public investment takes place in infrastructure, education, research, and the like. Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity. Deficits in excess of a gap growing as a result of the maximum feasible growth in real output might indeed cause problems, but we are nowhere near that level.

Even the analogy itself is faulty. If General Motors, AT&T, and individual households had been required to balance their budgets in the manner being applied to the Federal government, there would be no corporate bonds, no mortgages, no bank loans, and many fewer automobiles, telephones, and houses.

The Chaser in “Yes We Canberra” highlighted this in a personal sense with Tony Abbott’s “sinful and profligate debt” in purchasing a house valued at more than he earns in a year.

Another widely spread fallacy – one that is used by the US tea party movement and by Barnaby Joyce (et al) is that public debt is “generational theft”.

Fallacy 14:

Government debt is thought of as a burden handed on from one generation to its children and grandchildren.

Reality: Quite the contrary, in generational terms, (as distinct from time slices) the debt is the means whereby the present working cohorts are enabled to earn more by fuller employment and invest in the increased supply of assets, of which the debt is a part, so as to provide for their own old age. In this way the children and grandchildren are relieved of the burden of providing for the retirement of the preceding generations, whether on a personal basis or through government programs.

This fallacy is another example of zero-sum thinking that ignores the possibility of increased employment and expanded output. While it is still true that the goods consumed by retirees will have to be produced by the contemporary working population, the increased government debt will enable more of these goods to be exchanged for assets rather than transferred through the tax-benefit mechanism.

This fallacy is another example of zero-sum thinking that ignores the possibility of increased employment and expanded output. While it is still true that the goods consumed by retirees will have to be produced by the contemporary working population, the increased government debt will enable more of these goods to be exchanged for assets rather than transferred through the tax-benefit mechanism.

Just like the conventional wisdom amongst media political commentators – most of which is just recycled conservative talking points – much economic commentary in Australia mindlessly accepts many fallacies.

For those of us who want to promote progressive views, this CofFEE article is a good tool for us to challenge these fallacies.

Further suggested reading: We Are All Dead – occasional blogging by an ACTU policy wonk.

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7 Responses to “Economic fallacies: debt”

  1. Thanks for the link, but I'm not an economist!

  2. Actually, this is a better link to Vickrey’s paper: http://www.pnas.org/content/95/3/1340.short

Trackbacks/Pingbacks

  1. Alexander White - October 20, 2010

    @Deanrizzetti debt as a generational burden is an economic fallacy: http://bit.ly/ab7g7G @jessiegiles @andyshastings

  2. peter sweeney - February 23, 2012

    RT @alexanderwhite: Economic fallacies: debt http://t.co/ayS7n4Xo

  3. Mushroom and Rooster - May 9, 2012

    Economic fallacies: debt – http://t.co/wUaBvet4

  4. Andrew Hastings - May 9, 2012

    An old post highly worthy of a revisit. RT @alexanderwhite: Economic fallacies: debt – http://t.co/P8cMgDAR

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