Archive for April, 2017

Personal versus Government Debt

April 12, 2017

Personal debt is relatively easy to understand. A person borrows, often for a specific purpose – house, car, education, vacation etc. –  knowing what the interest cost and terms of repayment will be. Once in receipt of the funds the money becomes fungible and can be used for any purpose including a specified item. The loan may make it possible to purchase the item, but the actual dollars used may come from any source available to the buyer.


Repayment is a condition of the loan and can only be avoided by renegotiating the terms, or defaulting on the loan with various consequences. For personal loans, the interest rate will be known at the outset, although there may be conditions for revising it if say the government alters interest rates through changes in monetary policy.


Consumers are generally aware of their personal debt situation, and can anticipate what will happen when various circumstances change which affect their ability to repay or service the loan. Use of a loan enhances their ability to acquire goods and services which can differ in terms of what is purchased. A loan spent on a vacation, a meal or attending a concert will have different consequences than if the expenditure is made on a house, car, medical procedure or attending an educational establishment. The latter represent a capital investment that can lead to an enhanced flow of income in the future; the former may give immediate satisfaction but have less lasting benefits.


The nature and consequences of personal debt are fairly easy to describe and appreciate. Public or government debt is a different kettle of fish in terms of measuring its size and understanding its ramifications which include these and other factors:


  1. Government expenditures are financed by a combination of tax revenues and, if needed, borrowing, the latter becoming part of the national as opposed to personal debt. But that debt becomes personal as it is shared by all Canadians and includes the debt of all three levels of government. If governments make poor economic decisions causing increased deficits, then their, and our, levels of liability increase, and Canadians would be likely to face higher levels of taxation.


  1. Public debt does not have to be paid off. A ten-year government bond does have to be redeemed at the end of the decade but usually it can be replaced with another bond. A government’s borrowing capacity is thus greater than that of most individuals. It has a much longer lifespan and a continuous and often growing source of revenue to service its debt and repay past loans.


  1. Trying to figure out the size of a country’s national debt and its consequences is extremely difficult, at least for me. An internet search results in different concepts of debt being used. Gross versus net debt is fairly obvious, but different sources will quote different figures for net debt for a country in a given year. News reporting is not helpful with reports merely printing what some source, that is thought to be official and thus reliable, publishes.


  1. It is often stated correctly that government debt incurred today will have to be repaid by future generations. Whether this is a bad thing or not depends on what the increased debt is used to finance. If it builds and/or repairs highways, hospitals, airports, ports and educational facilities, this represents an investment for future generations. Failure to make such public expenditures would be a detriment to future generations. Of course, there are limits as to how much borrowing can be done at any time, but these type of investments are different from other items of expenditure.


  1. National debts are sometimes reported gross and sometimes net with the net figure deducting assets which the government owns such as land, buildings, equipment including military equipment. Some physical assets may be easy to value but how do you value land in Canada’s national parks. These have significant value but since the government would not consider selling them then their only value comes from the revenue generated by visitors less the cost of administering the parks. (A similar private sector situation arises with churches which often find it difficult to borrow money using the building as collateral).


I don’t think economists or journalists do a good job of explaining the nature and consequences of deficits and debt except to repeat what each other say. It is not an easy topic to untangle, but if the absurdly low current interest rates on short, medium and long-term government debt persist there are likely to be severe repercussions. Bondholders holding bonds with negative real returns on their investments may turn away from government lending, causing interest rates to rise with consequences throughout the economy.


John Cochrane has an interesting article on debt and inflation at

What’s special about infrastructure spending?

April 9, 2017

Two economic topics in North America are the return of manufacturing jobs and investment in infrastructure. The first is not going to happen because the nature of manufacturing has changed as automation takes hold. It is similar to what happened to agriculture when tractors and combine harvesters replaced manual labour and horse drawn equipment. Output grew but using a different combination of labour and capital. More farming output is now produced with far less labour, while more labour goes into producing the tractors and harvesters for the way farming is now undertaken. The same is happening today to manufacturing with more labour going into activities like writing software to run the machines which produce goods in place of manual labour.
Infrastructure covers a wide range of items like roads, bridges, railways, airports, harbours and communications facilities. These all require continual maintenance. Failure to do this on a regular basis escalates the the cost of restoring the infrastructure, while the quality of the services provided such as road and rail safety diminishes. The alternatives are spending today to maintain infrastructure or spending more tomorrow. If the latter is chosen not only will the cost be higher, but the service provided by the infrastructure will be of lower quality and impose cost on others. For example, unfilled highway potholes cause the deterioration of motor vehicles.

Much government activity is associated with expenditure on infrastructure such as schools, universities, hospitals, defense facilities and equipment. Failure to replace and renew equipment for the Canadian navy and airforce creates a saving today while placing a burden on future generations. The same is generally the case for other areas of infrastructure spending.

When a government announces that it will increase infrastructure spending, it is frequently the case that it is going to remedy the failure of previous governments to maintain facilities in good working order. Home owners know only too well what happens to buildings if items like roofs and windows are not repaired and woodwork is allowed to deteriorate for lack of painting. It represents a failure to maintain the value of family infrastructure. Governments forced to increase this type of spending are doing what all governments should be doing, but often fail to do on a regular basis. Far too much attention is often given to the cost of new capital expenditures as opposed to the future ongoing costs of maintaining the capital in good working order.