Democracy’s Debt Dilemma

September 2, 2012 § Leave a comment

Is every democracy destined for the problems of Greece?

In writing Passion & Purpose, my coauthors and I heard a lot about the traits and aspirations of the next generation of leaders. But we also heard a great deal about their concerns. A key anxiety is debt. Not just student loan debt or credit card debt, but public debt, which can threaten social stability and lead to higher taxes and cuts to government programs.

This concern is not new. Young people have feared for quite some time that their predecessors were living beyond their means. One U.S. poll in the early 1990s indicated that more young people had faith in UFOs than the continued existence of Social Security. And at that time, the United States had a public debt/GDP ratio of around 65% — a number that has since passed 100%.

Nearly every major democracy is now struggling with public debt. According to The Economist, the world’s governments currently hold debts of approximately $45 trillion (relative to a world GDP of$65 trillion). And many of the world’s top debt holders are its largest and most powerful democracies. The following table, based on IMF projections, is a list of the top 20 global economic powers (by GDP):

Thumbnail image for table for Coleman blog.jpg

Other mature but smaller democracies have huge debt-to-GDP ratios as well, including Greece (166), Ireland (109), and Portugal (106). And few of these countries are on track to reduce their debt burdens. The U.S., for example, ran an approximate 10% budget deficit as a percent of GDP in 2011, with other countries like the UK (–9.4%), France (–5.7%), and Japan (–8.9%) running similar deficits. And if the U.S. is any example, the trend is greater debt over time. Europe is suffering what is being widely termed a “debt crisis,” and as a recent IMF report notes (PDF), “overall public and external debt levels of the euro area are lower than those of the United States and Japan.”

This issue is often positioned as a crisis of leadership, and indeed, political leadership is relevant to any question of public policy. But given that few mature democratic societies seem to be living within their means, the causes of this persistent and rising debt seem to be at least partially structural.

This should concern young leaders. Macroeconomic problems often impact the young the most; consider youth unemployment rates in France and the U.S., for example, or Japan’s so-called “lost generation.” And younger people both run the risk of losing access to government programs and bearing the burden of paying off those debts in the future through inflation, higher taxes, or other measures.

So why do democracies struggle with debt? I see two key reasons:

1. Concentrated benefits, diffuse costs: In developing Public Choice Theory, economist Gordon Tullock (among others) has written about the concept of concentrated benefits and diffuse costs. When a politician passes a policy that leads to a $5,000 benefit for one person and an incredibly small cost to the rest of society, she is rewarded with the beneficiary’s vote and goes unnoticed by the millions of people who bear that small cost. If the broader population does notice, it is unlikely to organize and act on such a small cost. But when hundreds of politicians pass these benefits for millions of parties, the result are massive increases in spending — often funded through deficits and debt.

2. Intergenerational wealth transfer: Debt can often be seen, essentially, a loan from future generations to the current generation. In a democracy, some of the least represented individuals are the young or those from future generations. Young people vote less. They donate and volunteer less. And their concerns — 20, 30, or 40 years in the future — seem distant to voters and politicians concerned with two-year election cycles and short-term economic desires. Therefore, it’s easy for current voters to rationalize spending without worrying too much about the implications for those who will have to repay it and for politicians to pay attention to those who vote, volunteer, and donate more regularly. As economists W. Mark Crain and Robert B. Ekelund, Jr. note, voters regularly prefer deficit spending to pay for benefits rather than taxes, and this can lead to the perennial deficit problem experienced by many democracies.

Of course, not all democracies are currently weighed down by unsustainable debt. Australia, for example, seems to have thus far skirted the issue. And there may be a great deal to learn from those countries which have managed to maintain fiscal balance in spite of the reasons outlined above. But many democracies are struggling with the consequences of deficits and debt, and those problems may hit young people and future generations the hardest. As Italian Prime Minister Mario Monti said of his own country recently, “The huge public debt of Italy isn’t the fault of Europe; it’s the fault of Italians, because in the past we didn’t pay enough attention to the well-being of the young and the future adults of Italy.”

What do you think? Is debt a structural problem for democracies? And what can the next generation of leaders do to address it?

This post is part of a series of blog posts by and about the new generation of purpose-driven leaders. It was originally posted at HBR.


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