Lawrence Summers has a regular monthly Op-Ed in The Washington Post, which he used today to call for the U.S. government to increase its debts at today’s historically low interest rates. Mr. Summers is a former Secretary of the Treasury and one of the world’s foremost Keynesians. His article is generating furious denunciations on the political Right and effusive praise on the political Left.
These disparate responses reflect the two opposing views of the source of capitalism’s success. One view honestly believes that economic growth and expansion is created by borrowing the capital to pay for investing, while the other view honestly believes that economic growth and expansion is created by using accumulated savings to pay for investing. This is the notorious dichotomy of Hayek v. Keynes; savings versus borrowing as the engine of capitalism. Four points to make:
First, Keynesian economics is Fabian socialism, and there is no empirical argument that any form of socialism generates prosperity. Socialism is an ideo/theology whose only strength is about how to spend the prosperity capitalism creates; it has no intellectually-robust, prosperity-generating facts in its theory.
Second, borrowing even at a real rate of zero–which has Mr. Summers salivating for increasing government debt–is exactly equivalent to increasing taxes, which pull money out of the private sector–at zero interest costs–to pay for government services. The blind side of Mr. Summers argument is in not observing that the increased debt must be paid by taxpayers, not by anyone else. Every dollar spent in taxes or zero rate government debt is a dollar not spent by human beings on their families’ personal wants and wishes.
Third, borrowing only makes rational sense in two cases: if the return on the investment created by the borrowing is greater than the cost of the borrowing, or the borrowing at a lower interest rate is used to retire the same amount of debt at a higher interest rate. When individuals or corporations borrow, the return is expected to be greater than the known cost. What is the ‘return’ to the taxpayer on a government service during peacetime? And if government bonds are not callable, why borrow more since we cannot early-retire the higher cost debt?
Fourth, the Hayek/Keynes dispute is a too-typical example of the monistic either-or dichotomy that we have had with us for 4,000 years of monistic religions and two hundred years of monistic ideologies. Actually, capitalism is pluralism, which means you can generate capitalism’s prosperity either by borrowing or by savings, or by both.
Mr. Summer makes a seductive argument; at record low rates, let’s borrow a fortune to finance government investing in infrastructure like roads and bridges. If a road or bridge generates a greater yield than its cost, he has a good argument. But, where are we to find out what the “greater yield” is for any government peacetime cost?
Mr. Summers is a Keynesian. He has a very seductive argument, couched in terms of how to increase prosperity by borrowing. But without any empirical measure of such increase borrowings’ yield, the increased borrowing is no better than an alcoholic’s next drink or an addict’s next fix.