Steve Keen's DebtWatch No. 14 (Part of)

By: AlanK (Registered ) on 22-11-2007 12:29

Steve Keen's DebtWatch No. 14 October 2007 
The Political Debt Cycle 
Both parties will make much of their economic management credentials in this election campaign. 
Many Australians, on the other hand, seem convinced that the economy would do as well regardless of which party were in power. 
The average punter has it right: luck, rather than skill, has determined which governments in 
retrospect came up smelling like roses in the economic management stakes, and which instead 
smelt like manure. 
By far the biggest determinant of political luck is what was happening to private debt while any 
given government was in power. If debt was rising, then the government looked good; if it was falling, then the government looked bad. 
How come? Because there are two ways in which you can finance spending: you can either earn 
the money, or you can borrow it. Your total spending in any one year is thus the sum of your income plus the change in your debt. The crucial issue is how you spend that borrowed money: if it is being consumed or gambled, then you will come to grief; if instead you are investing in a business, or successfully speculating on shares or houses, then you can pay your debt off and end up much wealthier than when you started. 
The same spending equation applies at the national level, so that aggregate demand is the sum of 
GDP plus the change in total debt. But the conditions under which an increase in debt can be for the good are more restrictive for the nation than the individual. The country can gain if the borrowing finances investment, but not if it finances speculation. 
Investment--building new knowledge, new factories, new houses--increases the country's 
income-generating capacity. Speculation--gambling on the prices of shares and houses--just changes who owns what within the country; it doesn't add to aggregate income at all. Borrowing for speculation can be good for the individual speculator who sells on a rising market, but ultimately it just drives the country as a whole deeper into debt. 
However, in the game of politics, that economic distinction doesn't matter: a speculative dollar 
spent boosts demand just as much as an investment dollar. If you happen to come to power when a speculative borrowing binge is on, then you can look like a miracle worker, simply by "Being There" at the right time. Woe betide you, however, if you take over

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