Deficit-Financed Public Investment: Is It Generational Theft?

Debt is something to which we can all relate. At some point during our lives, nearly all of us will have to borrow money to finance activities such as buying a car, paying for a college education or bridging a period of unemployment.
 
In and of itself, debt is neither inherently good nor bad; it is merely a tool. Its value is entirely contingent on what it is used to purchase or invest. Taking out a loan to finance a college education—an investment with clear future returns—is categorically different than borrowing to finance unnecessary lavish purchases.
 
We can think about government debt in a similar fashion--what led to the federal government’s debt is just as important as the total dollar value of debt incurred. Where the analogy between household and government debt falls short, however, is with long-term and very large investments. Unlike individual households, it is reasonable to assume that governments (particularly the United States) will not go bankrupt and can operate under the assumption of a very distant horizon.
 
There are many arguments both for and against debt and deficit-financed public investment. In an upcoming series of posts, I will address the generational argument—the idea that we are robbing from younger (and yet to be born) Americans to pay for our current activity. Today I will tackle the question of general deficit-financed public investment. Later, I will consider deficit-financed stimulus in recessions, as well as the implications of Social Security and Medicare for future generations.
 
Martin Feldstein, chairman of the Council of Economic Advisers during the Reagan administration, summarizes well the opposition to deficit-financed public investments. He asserts that “[f]iscal deficits impose a burden on future generations; borrowing only postpones the time when taxes will have to be paid.” While it is true that future generations will inherit the obligation of repaying past debts, they will also inherit the benefits of deficit-financed public investment spending (the generational burden argument is irrelevant if new spending is completely accounted for by new revenue).
 
Government spending, when deployed effectively, can result in investments with important returns for years to come. Public spending on infrastructure—highways, airports, and rail lines—and human capital—high quality education and healthy populations—are critical for a well-functioning economy and competitive workforce.
 
Large-scale public investment (and deficit-financed investment) is not new. Government financing of infrastructure (particularly rail lines and sewage systems) facilitated the rapid urbanization and industrial development of the Industrial Revolution. The Louisiana Purchase (1803), the Homestead Act (1862) and the Land-Grant College Act (1890), which founded the public state university system, are other examples of expensive—yet crucial—investments by the United States government with the well-being of future generations as the return. Their gains are still being realized today.
 
These sorts of investments also increase the likelihood that future generations will be wealthier, and therefore in a better position to pay off our debt obligations. Today’s elderly have lived through extraordinary advances in technology that have raised living standards for all and generated considerable economic growth. To be sure, these gains have not been shared equally, but collectively they have meant that current generations are substantially better off than past generations.
 
We can only sustain this trend by continuing to make the same sort of productive investments in human capital, technology and infrastructure as discussed above. It would be generational theft not to.
 
 
(Image by Andrew Choy; Brooklyn Bridge at night)
 
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