The current public debate about new government austerity measures amounting to billions is greatly overshadowed by pessimism surrounding debt and borrowing. Dirk Bezemer, Associate Professor of Economics at the FEB, says that it is too often forgotten that public borrowing is a tried and tested instrument for dealing with debt situations. ‘The present conditions in the Netherlands are ideal for government investment, rather than austerity measures. The state can now borrow at extremely low interest rates and attract large volumes of savings for public investment.’
Terms such as ‘debt’, ‘income’ and ‘borrowing’ are often viewed as separate from one another. This is incorrect, says Bezemer. ‘Debt is simply the other side of borrowing and borrowing is a powerful instrument for creating income and economic activity. When a country borrows more, it can then create more income. As both increase, the ratio between debt and income (the burden of debt) can remain healthy. In short, debt is not always a bad thing. Conversely, government cuts to tackle rising debt may erode the national income. Austerity measures and cuts therefore often fail to reduce the burden of debt, since income may fall faster than debt. That’s what we are seeing again now.’
Investment offers a better means of dealing with debt problems. ‘The Netherlands emerged from the Second World War with a debt amounting to 200% of the national income. Ten years later that debt had been halved. The conditions were quite different, of course, but the issue here is that this halving of the debt took place through investments which led to a major increase in income.’
According to Dr Bezemer, there is a widely held misconception in the present public debate on austerity measures in the Netherlands. Government finances are being compared with the notorious housekeeping book which has to be ‘properly balanced’. ‘A household which spends more than it earns and therefore ends up in debt, can reduce its debts by spending less. But when the government spends less, something quite different happens: our income goes down. Spending by government, after all, contributes to our combined income – whether this be investment in infrastructure, unemployment benefits or civil service pay. A government deficit means that the government has spent more into the economy than it has drawn from the economy in that year. That’s OK, isn’t it? Provided it is invested wisely, a government deficit can be good for income growth. The burden of debt therefore does not have to rise.’
Central to Bezemer’s research work is the fact that money itself is a form of debt. In a frequently viewed video lecture on YouTube, he explains that coins and bank notes, for example, are literally symbols of debt and borrowing. Borrowing is a necessary driver for economic activity and an expression of the degree of faith that we have in the economy. The borrowing instrument should not be disregarded when fear of debt takes over, as is happening now. And certainly not by a party, i.e. the government, which is in a unique position to increase that faith, particularly when private sector economic activity is faltering.
‘Government lending can support new economic activities now that private lending has fallen as a result of the financial crisis,’ says Bezemer. ‘The government could facilitate new economic activity by investing in roads, wind turbines and health care, for example. Government investment in for instance utilities leads to economic activities which increase national income.’
‘The government could do this by selling bonds which, because of the extremely low interest rates, is a very attractive option at the moment. Or it could support investment in other ways, by setting up a public investment bank, like the Kreditanstalt für Widerafbau in Germany, for example. A bank of this type then attracts money from the market and does not work with money borrowed by the government but can finance investments which could otherwise not be made. The role of the government in such banks is that of guarantor for the soundness of the bank.’
‘What I am arguing for is that we recognize that our economy is in need of investment right now. We would like to see consumers spending and companies investing but if they cannot manage that for the moment, we then shrink away from making government investments. This is costing us hugely in terms of economic activity. The taboo on government deficits in this debate is extremely damaging.’
Dirk Bezemer is Associate Professor in the Faculty of Economics and Business at the University of Groningen. He gained two MSc degrees from the University of Wageningen and a PhD at the University of Amsterdam and was a researcher at Imperial College, London. The research team he leads in Groningen works on financial fragility, economic models and the causes and consequences of the financial crisis. With the Faculty’s communication team, Dirk Bezemer recently produced a series of public video lectures on debt and borrowing entitled: ‘Debt: The Good, the Bad and the Ugly’ which is often viewed on YouTube.
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