Michael Hicks: Three types of public debt

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Hicks

There are three types of public debt. Each imposes some risks to the economic fortunes of the nation or a state. Each type differs in important ways. Each can be politically manipulated to make searing, but often mistaken points. Indeed, it requires a rare level of political integrity to speak of them with equal concern.

The first type of public debt is the one we’ve all heard about. It is too much spending matched with too little tax collections. The federal government can accrue debt easily, since it can let bonds. State and local governments can also accrue, by borrowing on municipal bond markets or underfunding pensions. Both of these debts are common. They are readily observable and easy to criticize as thoughtless disregard for future generations.

The second type of debt is too little infrastructure or capital spending. This might take the form of poorly maintained roads or water and sewer systems. It may be deferred maintenance on government buildings or the use of antiquated equipment, software or vehicles. This sort of debt doesn’t appear on balance sheets, but its effects are real. Later generations bear the burden of this type of public debt, just as they do financial debt.

The third type of government debt lies in providing inadequate public services. This is mostly comprised of national defense, schooling, policing and public health. Again, this deficit doesn’t appear in balance sheets of national or state fiscal health, but it does appear in the economic data. In particular, underspending on schools, public safety and health all appear in data on educational attainment, crime rates, fire deaths and health of a state or county’s population.

Too little spending on national defense always affects young people. It is they who bear the cost of conflict. Young people also bear the costs of too little education, too much crime or poor public health. Indeed, all types of public debt are effectively transfers of wealth from the future to our present selves.

All three of these types of public debt can slow economic growth, but the effects are far different. Despite what you often hear in public discussion, the least economically damaging of these is financial debt. Though worries about public debt are certainly warranted, dollar for dollar, the economic consequence of financial debt is likely the smallest of the three. The reasons for this should be obvious.

First, some public debt is undertaken wisely, just like a low interest rate home mortgage. Public debt that increases the productivity of the economy may pay for itself. Second, some types of spending are designed to avoid higher long-term costs. For example, it took us about 50 years to pay off our debt for crushing Hitler and freeing half the world, a bargain at twice the price. Third, financial public debt is readily observable and can be addressed pretty quickly. Other types of debt take much longer to recognize, act upon and have the remedy take effect.

Infrastructure or equipment debt can be very costly to fix and can take decades to catch up. That’s why so many of America’s cities still have poor water systems, bad roads and decaying buildings. This type of debt made us unprepared to face Hitler’s mechanized army in 1941 and emboldened the Soviets in the 1970s. Our military capital deficit of the 1930s and 1970s cost us more over the long term to defeat those enemies. Again, it the youngest among us who bear the burden of any debt.

The most economically challenging type of deficit lies in providing inadequate services. Places with poor policing are abandoned as people vote with their feet. Anyone who visited New York City in the 1980s, or Portland, Oregon today can readily observe the economic damage of poor local services. But, crime rates can be reversed in a decade or two. The effects of inadequate education persist for a lifetime.

The single hardest public debt to fully remediate is inadequate education. This should seem obvious, but for individuals, the window of obtaining secondary and post-secondary education is very narrow. Missing that window may mean a half century or more of lower earnings and less certain employment. For cities and states, a shortfall in educated citizens is even more damaging. Poorly educated workers typically don’t migrate to other cities or states. So, every young adult who is poorly educated remains local. Inadequate education becomes a half century problem for communities. That’s roughly equivalent to the time it took to pay off the debt of winning World War II, and education would’ve been far less expensive to provide.

Just to be clear, my argument here isn’t about any single political party or political movement. At the federal level, Republicans and Democrats alike are content to run up public debt. It is the most bipartisan of political activities. Still, some of the debt comes in the form of a staggering financial debt, while some of it comes in the form of too little infrastructure investment.

At the state level, the Democrats tend to dominate politics in places with the worst financial debt; Chicago, Detroit, and Massachusetts come to mind. However, the GOP dominates in places that underprovide public services; Mississippi, West Virginia and Alabama come to mind. But, even these stereotypes have big exceptions.

Iowa and Utah have long had very good schools, and are both solidly red states. Vermont, who routinely elects a socialist senator, is a low financial debt-burdened state. Meanwhile, deeply Republican Alabama has a high financial debt. West Virginia barely invested in people when the state was run by Democrats, and the new GOP majority has continued that pattern.

The point of this column is to help spark a more thoughtful discussion about taxation and public spending. Taxes are the price of public services and infrastructure. Despite what many folks think, business and households are not oblivious to the quality of those public services. Political leaders who focus only on one type of debt—be it fiscal, infrastructure or public services—do a disservice to taxpayers.

I suspect the main reason that higher tax places grow faster than low tax places is because the elected leaders of those places are more transparent. They treat their constituents with enough respect to tell them the truth about taxes. Most importantly, they collect enough taxes so there is little public debt of any type—financial, infrastructure or services.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University. Send comments to [email protected]

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