Wednesday, April 30, 2008

The Vice of Thrift

About a month back, Alan Greenspan responded to critics of his Fed, claiming that the housing crisis was actually caused by the abundance of global savings. Becker agrees with this assessment (while noting the Fed made some contribution.)

Worries about Social Security's insolvency aside, this isn't the first time we've seen the anti-savings (/pro-debt) side of Greenspan. The former Chair told a congressional committee a few years back that the U.S. could healthily take on considerably more debt than it currently owed, that its approach towards national debt was probably overly conservative.

My initial instinct is skepticism.

But Greenspan might be right. The elimination of all debt is hardly a universally wise strategy. Whenever investments would increase your ability to pay beyond the prevailing interest rate, the better tactic is to borrow. Avoiding debt in these situations is, in fact, wasteful.

Educational loans are one example of this, the lifetime returns to education trounce the amounts that will be forfeited in interest to finance a quality education. The heavy subsidies of these loans make them an even better deal. The potential engineer who decides not to take on the debt benefits no one, and hurts both himself and the lender.

Peter Singer has famously and vigorously argued that we have a moral obligation to give away all we earn once we have accounted for our necessities. Perhaps you're unwilling to go so far. Maybe your skepticism only admits a moral obligation to pursue Pareto Optimality, that is, to help others when it wouldn't hurt us at all (and not cause others pain when it would cause you no benefit). If you have such a baseline morality, you might find that our potential engineer, who has the opportunity to benefit himself and a lender, commits a grave moral wrong if he simply stays home to count grass.

Government investment in infrastructure can be analogous to individual investment in education. Based on the moral sketch above, is it possible that governments are irresponsible to shoot for zero debt? (Ignoring, for a moment, all the other inevitable immoralities of government.)

I'm often been excited by attempts to constrain Congressional spending. But maybe a balanced budget amendment would be better if it forced Congress to maintain a constant debt of 5% of GDP!