Re: Townhall.com – 2/9/2009 – “Our Deadly Debt: How “Stimulus” Prolongs Pain” Dick Morris & Eileen McGann

Morris & McGann apparently are unable to distinguish debt to fund consumption with debt to fund investment in future production.

Debt supporting consumption is a dead weight on the economy --- it results in no long term income to the debtor necessary to pay off the debt, and as such is a capital drain on the economy in the future. In the present, however, it encourages consumption and thus helps the economy. Debt supporting investment is paid off from the future returns on investment and does not serve as a drag on the economy --- in fact, it is one of the major driving forces of a strong economy. No amount of debt is excessive so long as it: (1) in the long term is paid back by the economic gains from the investments it finances, and (2) in the short term requires no more repayment than cash flow provides. Both consumption and investment debt will help our current economy, but only investment debt will not hurt our future economy.

A college education is not a consumable and does not depreciate. Spending for education is an investment that is easily statistically justified by the increment in future earnings that education generates. Education is an important foundation of innovation and productivity growth. On both a personal and societal level, investing in education is wealth producing. Low cost government loans are appropriate for financing education because the payback time on educational loans is too far into the future to allow borrowers to service their dept near term, and too risky (due to possibilities of untimely death of debtors) for loaners without a huge base of loan customers. But for government, with a huge statistically significant debtor base and a long term prospective, the individual risk in the short term is adequately compensated by the long term return.

Morris & McGann should look to history (the Great Depression, Japan’s recent deflation) and see that our current economic problems may well last past next year, and that an exclusively short term focus may well be detrimental to the solution of our economic problems.

I would agree with Morris & McGann that government borrowing and spending to support non-income producing personal assets is unlikely to help and likely to hurt our attempts to shake our current economic problems. But I strongly disagree with Morris & McGann on the desirability (perhaps even necessity) of other forms of government loans and expenditures at this point in time.