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Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, dean emeritus of the Clemson College of Business and Behavioral Sciences and a former executive director with the Federal Trade Commission.
My father did not spend a lot of time advising me on how to manage my affairs. He was too busy earning a living, I guess, and preferred to teach by example. But he did pass along two pieces of advice that are relevant to our times.
“Always pay yourself first,” he said. “Even if it is just $5 a week, put something in a savings account every payday.” I followed his advice, and when I discovered the power of compound interest, I realized I was on to something good.
His other advice had to do with using credit. “Never buy food or gasoline on credit,” he insisted. “Once the food is eaten and the gasoline burned, you will be stuck with paying for it, and that’s not easy.” His point, of course, was to use credit to purchase long-lasting assets — cars, furniture, a home — and not for momentarily important-but-fleeting pleasures. From a business perspective he was in the production side of a newspaper, and he explained to me that investment in improved machinery could pay for itself. It was okay to borrow for that.
Oddly enough, I don’t remember my father ever using a credit card. But I made up for that. I use credit and debit cards a lot.
I raise these memories as I think about President Joe Biden’s effort to push a $1.9 trillion coronavirus stimulus bill through Congress, and what will likely be a large infrastructure spending bill after that. A major part of the current spending proposal is for coronavirus protection, which, as investment in human capital, can pay for itself from improved life expectancies, among other things. But other proposed parts of the plan call for sending checks to people — many of whom don’t need it — and hoping that they will get out and spend the money in order to juice up the economy.
How they choose to spend the money is the larger question. Will it be for more restaurant excursions, beach holidays — my father’s version of a teenager buying gasoline and food — or child care, home improvements, education and other investments that have a long-term expected payoff? Of course, stimulus spending involves using someone else’s money without having a payback worry, at least directly, and that may bias the spending in favor of food and gasoline.
Since the 2008 Great Recession, we the people have practically worn out our government credit card. In 2009’s first quarter, total public debt, which is what we borrow as a nation, stood at $11.5 trillion. By third quarter 2020, the total was $26.9 trillion. And way back in 2005’s first quarter, the total was only $8.4 trillion. That’s better than a three-fold increase in 15 years. The managers of the people’s business have not paid the people first — at least not in the smart financial sense — and to make matters worse, they have borrowed and spent a lot of money on “food and gasoline.”
But all may not be lost. It hasn’t all been food and gasoline. Across these years, there have been investments made in nutrition, child care, education, infrastructure and other features of the economy that could make the average American more productive at work, and thus more prosperous. This is a dream of an idea, and fortunately after a long period of slow growth, labor productivity has accelerated. Let us hope this trend continues.
So how will we pay off our credit card debt, or better put, how will our grandchildren pay off the debt for us?
Like all debt, when the bill hits the kitchen table, one can turn to the cookie jar and use its contents for part of it. Savings can be drawn down and some assets sold to make that possible. And then comes the hard part, the belt tightening part, which means a reduced level of living for us or for those who come later.
When faced with a pandemic crisis, high unemployment and serious unrest in capital cities, we must borrow to pay our way out of trouble. But we must remember that today’s increased debt will be paid off in the future, one way or another. Perhaps this experience will help remind us of when we truly need to borrow and when we do not.