Debt Dynamics

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Norm Coleman, former Minnesota Senator and current head of the American Action Forum, alleged that “only Washington politicians and limousine liberal economists would think that going further into debt would help you get closer to getting out of debt.”

If that’s true, then the entire existence of business lending becomes somewhat puzzling. In reality, it’s clear that going deeper into debt can improve your financial well-being in a wide variety of circumstances. You’re a truck driver and your wife’s a waitress. If she stops working to go back to school and finish her nursing degree, you’ll lose income and go deeper into debt. But nurses get paid a lot more than waitresses, so going deeper into debt will increase your family’s prosperity. Or you run a popular, profitable sandwich shop that’s located in a building you bought with borrowed money. Revenue easily covers the cost of the mortgage. The opportunity arises to expand to a second location in a new neighborhood with little competition and favorable demographics, but you’ll have to borrow more money in order to expand. Again, going deeper into debt will increase your business’ prosperity.

In all cases, what’s relevant is not the debt but the cost of interest and the merits of the underlying proposition. In the case of the US government during a recession that features low interest rates, it makes tons of sense to borrow money in order to do things that are genuinely useful or that mobilize genuinely idle resources.