S3E32: Why Do Governments Go In Debt?

History of Wars & Nation-building. Sovereign debt history of empires, city-states, early republics & parliaments, and democracies. On August 1, Fitch Ratings downgraded America's credit ratings from AAA to AA+, which means that Germany, Luxembourg, Netherlands, Sweden, Switzerland and Denmark now have a better credit rating than we do. Fitch Ratings' stated reason for this month's downgrade is "erosion of governance" in the U.S., which makes sense. Back in June, we were on the brink of a national default - thanks to our politicians who were playing political chicken with our nation's debt. And if you recall, back in 2011, during another debt-ceiling standoff between Congress and the White House, Standard and Poor's downgraded the U.S. government credit rating one notch below the top grade. (WSJ, 8/1/23).

But does this Fitch Rating's downgrade really matter?

Just last week, Greg Ip, the Chief Economics Commentator at The Wall Street Journal, a senior financial reporter whom I've followed and read for many years, asked the same question. And then, answered it. Yes, it does matter. The risk has to do with rising deficits and interest rates. (WSJ 8/9/2023).

The Congressional Budget Office estimates that we'll continue to run a federal budget deficit, which it projects will reach 11.1% in the next 30 years. (WSJ, 7/27/23). The CBO also estimates that by 2029, the federal government will spend more on paying interest on our national debt than it will spend on our national defense. (NYTimes, 7/5/2023).

So, is public debt a bad thing, something to entirely get rid of? Not exactly!

To better understand public debt, its history and its useful implementations, I read Dr. Barry Eichengreen's book, In Defense of Public Debt, and invited him to our program. In this conversation, Dr. Eichengreen tells us when government borrowing started and for what purpose. Hint: the prime purpose of government borrowing in the past was war!

Most of this discussion with Dr. Eichengreen, as you will note, takes place in the historical context of European countries. This is because Europeans borrowed more frequently than countries in Asia and Africa. Naturally, my follow-up question is why. The answer, once again, has to do with war!

In this episode, we also talk about the role of central banks. Here, things get complicated. Dr. Eichengreen also answers this question: do democracies demand more debt? He also tells us how a democracy, such as ours, can run a surplus and eventually solve its public debt problem.

To learn more about Dr. Eichengreen (UC Berkeley Economics), you can visit his academic homepage.

Listen to Dr. Eichengreen's episode about the U.S. dollar & cryptocurrency.

Prior episode with Dr. John Cogan (Stanford University and the Hoover Institution), regarding the history of America's entitlement programs: https://bit.ly/HbN-S2E10

I hope you enjoy these episodes.

Adel

Host of the ⁠⁠