Writing in Poor Richard's Almanack, Ben Franklin declared "Rather go to bed supperless than rise in debt."
What a wonderful representation of what are often called the "Victorian virtues" (though the Almanack was printed prior to the reign of Queen Victoria). Debt is morally repulsive, not only to be personally avoided, but is a sin to pass on to one's children.If we could only return to this ideal, the future, the character, and the dignity of America would be restored.
The only problem with this, however, is that it's nonsense. There is nothing morally odious about debt in and of itself, or about borrowing for the future.
Consider Ben Franklin's aphorism. Which seems better: to go to bed hungry and wake up weak and unable to work as well, or to borrow against tomorrow's income so that you can eat and wake up strong enough to work? Suppose that if you eat one loaf of bread you can work enough to earn two loaves of bread and that right now you are hungry and have no bread. What is the moral dilemma about borrowing enough money to buy one loaf of bread, eating it, and then working enough to earn two loaves and paying back the debt? If debt is morally wrong then you shouldn't borrow even if you can pay it back. So it must be nonsense that debt is morally wrong in and of itself.
Now consider a working parent who has a child. This parent currently has a business which produces $100 a year worth of income, and he will pass on this business to his child next year. Now this father has the opportunity to invest $200 in improving his business and once he does the business will produce $200 a year worth of income. This parent doesn't have the money but can borrow it and has to repay the loan over 2 years, paying half each year. This means that the second payment will be made by his child, and so he is borrowing from his kid. Let's compare taking the loan and not taking the loan:
Year: 1 2 3 4 ...
Income without loan: $100 $100 $100 $100 ...
Income with loan: $100* $100* $200 $200 ...
*$200 income produced - $100 loan repayment =$100 income
So in year 2 when the child takes over the business he is no worse off than had the father not taken the loan out, but every year thereafter he is better off. Clearly the parent should take out the loan, even though the child has to pay some of it back, because the loan is used to make the child richer. But if it morally wrong to borrow from our kids, from the future, then this parent should not borrow and not make his child richer. Is that virtue?
It should be clear that there is nothing morally wrong about debt or borrowing from the future. The issue is whether the debt is being used toward something productive (earning more bread, making your child richer). It's not a moral question, its a practical one.
In truth, the fact that we have borrowing and debt is a sign of virtue: people are willing to lend others the resources necessary to improve. To be morally against debt is to tell people that even if they could do better, it is better that they don't. "Yes, you could borrow some food today and pay it back tomorrow, but you'd be a better person if you didn't." Is this virtuous?
Yet this is the basis on which we are told by some that governments shouldn't borrow, because it is morally wrong. It is perfectly reasonable to argue that governments shouldn't borrow money because they don't put them to productive purposes, that they will borrow $100 and only produce $90. That's fine point to make and one I think is very right. But that means the issues isn't the morality of the debt but the productivity of it.
The argument should be about what the government does with money it borrows, not whether or not it is moral for it to borrow. If the argument becomes "debt is morally wrong" then we have turned virtue into something vicious. We have consigned people to whatever their present circumstances are and nothing more.
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