What is the proper role of debt in public policy?
Most people would agree that when a government borrows money, it should be used to fund projects today that will provide positive benefits to the community for years to come. That mainly means things like investing in physical infrastructure to support not just projects that have high costs to create, such as roads, bridges, water treatment facilities, airports or schools, but also that will also last for decades while providing a positive return on investment through increased economic activity.
Under no circumstances however should governments borrow large amounts of money for the sake of sustaining their day-to-day operations that they cannot pay off with their direct tax collections within the course of a single year. These are not just expenses like the wages, salaries, and benefits of government employees and the office supplies they consume, but also for things that have relatively short life spans, which means that they will need to be replaced within in much less than ten years time. Things like library books, computer software, mobile phones, police cars, trash bins, et cetera.
The reason why it is such a bad thing to begin using large amounts of debt to finance short-term operational expenses is because of the mismatch it creates between the life span of the expense and the term of the debt. It makes absolutely no sense to pay principal and interest payments for a government-issued bond for thirty years for the sake of buying something like police cars today that will most likely be decommissioned in less than five years time. By the time the debt that supported these kinds of expenses will be paid off, the benefits provided to the public will have been long forgotten.
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
Be the first to read Political Calculation's column. Sign up today and receive Townhall.com delivered each morning to your inbox.
Today, at 11:20 AM PT: Get the Market Movements in Advance: William's Edge Webinar for October 24th, 2014 | John Ransom
In Other News: List of "Useless Government Spending" Strangely Doesn't Include Biden's Salary | Michael Schaus
Today, at 11:20 AM PT: Get the Market Movements in Advance; Williams Edge Webinar for October 22nd, 2014 | John Ransom
In Other News: Massachusetts School Board Moves to the Right of Democrats - Becomes Socialist | Michael Schaus