terça-feira, novembro 11, 2003
Shall We Borrow from the Children
The great majority of private individuals achieve some positive saving over their lifetime, the ratio of saving to personal income averaging from 2-3 per cent to near 20 per cent from country to country and year to year. The ratio is highest for individuals near the peak of their earning power and declines in old age, but it seems to be a near-universal aspiration, not confined to people who have children, to leave more at the end of one's life than one was given at its start. Dissaving via cumulative budget deficits runs counter to this objective. It consumes resources now which would otherwise have been available for future consumption. To add insult to injury, this pre-emptive move is not costless. Its cost, the debt interest which reflects the present generation's time preference, will be paid mostly by our descendants through the indefinite future.
Governments buy support by spending money, not by siphoning it away in taxes. Spending now and deferring the matching taxes to an indefinite future is dictated by the most elementary political know how and it should not surprise nor shock anyone to see it happen again and again, especially when elections approach and politicians start getting desperate. They are not wicked, they are just playing by the democratic rules. That the electorate is quite content with these rules, or at least does not try to alter them, is perhaps more difficult to explain.1 It may be that the bulk of the electorate just does not see the connection and cannot be bothered to think about it. Public choice theory has several other, less simple explanations for the contrast between collective and private behaviour. Whatever the reason, they are mutually contradictory and the economic and social consequences are fairly weighty.
The deficit and public debt problem shows up to varying degrees in the USA, most European countries and very acutely in Japan. The US has tried to stem it by placing a ceiling on the federal debt, a measure whose only effect is to oblige the Congress to raise the debt ceiling every time the rising debt catches up with it. Japan has so far not done anything systematic to control the debt. In Europe, fiscal histories and outlooks differ widely between countries. The twelve states that have adopted the euro have understood that a common currency combined with widely divergent fiscal regimes could give rise to dangerous and unfair free riding.2 To forestall this, in the Maastricht treaty founding the currency union they accepted the obligation to keep the national debt under 60 per cent and the budget deficit under 3 per cent of national income (GNP).
As was obvious from the outset, the treaty obligation is proving unenforceable. France showed no embarrassment in declaring, almost in so many words, that it will reduce its deficit to the Maastricht limit when it will find it convenient to do so. Less arrogantly, Germany is following much the same course. Only poor little Portugal is scrambling to obey the treaty, for what will not be enforced against big states may be enforced against small ones.
However, it is instructive to see what would happen if eurozone countries were strictly to stick to the 3 per cent limit year in, year out, not deviating from it in either direction. Let us suppose, counter-factually, that they all start with a national debt at 60 per cent of GNP. (This limit is in the treaty but carries no sanction).
What happens under this hypothesis as we move over time depends primarily on the average rate of growth of GNP. Assuming that the zone as a whole achieves growth at 2 per cent a year looks optimistic from the perspective of the dismal present, but should be feasible with only reasonable luck. Consider a ten-year time span,?not a long time for a currency union. At the end of Year 1, GNP rises from 100 to 102 and the national debt from 60 to 63. At the end of Year 10, GNP is at 122. The national debt rises to 93, which amounts to 76.4 per cent of GNP. The longer the period considered, the more glaring becomes the effect of the growth of the debt being faster than the growth of national income.
It would seem, then, that unless economic growth were much faster than we can realistically expect in a zone of welfare states, even durable obedience to some such self-denying ordinance as the Maastricht treaty cannot guarantee long-run equilibrium. Regardless of questions of morality, economic realities alone tell us that "borrowing from the children" had better not become a steady habit.
posted by Miguel Noronha 4:11 da tarde
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