Wednesday, May 20, 2015

Thinking about the nature of national debt

Immediate Source of Graph
Note that the total debt of the United States is not out of line with that of other countries.

Immediate Source of Graph
While there has been a great deal of discussion of the governmental debt, even combining the local, state, and federal government debt and the government sponsored entities, government debt is estimated to be less than household and corporate debt.

The article in The Economist from which the figures are drawn, "Ending the debt addiction: A senseless subsidy", makes a number of good points. One is that government policies can encourage or discourage debt. Thus, making payment of interest on debt tax deductible, but taxing profits (that belong to those holding equity in companies) can encourage firms to use debt financing rather than equity financing; excessive debt to equity can have serious implications in terms of risk. Here is one quote from the article.
Banks, inevitably, took most advantage, gaming the tax rules with devastating results. Most issued “hybrid” securities that were treated as debt by the taxman but as capital by credulous regulators. In the crisis hybrids did not act as a buffer that absorbed losses. About a third of big Western banks’ capital was made up of these instruments. Had they raised equity instead, fewer banks would have wobbled, says Ruud de Mooij of the IMF. 
I think that making mortgage interest tax deductible for small the poor is good policy, in that it helps the poor to build savings and encourages their commitment to their homes, neighborhoods, etc. On the other hand, I think making mortgage interest tax deductible for the rich simply encourages the construction of mansions for display, and encourages the purchase of MacMansions by those who wanabe rich.

Similarly, I like the idea of helping students borrow money to invest in their own education. Of course, borrowing to buy schooling that is of little personal nor social value (as seems to be done so often) is not good policy. Moreover, a lot of education should be publicly funded because the public rather than the student him/herself appropriates much of the benefit from the investment in human capital. Making the student him/herself pay for such investments that benefit the public by borrowing is bad policy.

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