The Little Book of Economics: How the Economy Works in the Real World, Revised and Updated

Chapter Fourteen

Good Debt, Bad Debt

How Government Borrowing Can Save or Destroy an Economy

George papandreou ran for election in 2009 promising to reinvigorate Greece’s recession-gripped economy by raising public salaries, investing in infrastructure, and helping small business. Shortly after becoming prime minister he discovered the budget deficit had exploded to 13 percent of Greek gross domestic product (GDP), much bigger than the previous government had let on. Investors fled the country’s bonds, driving their interest rates up to punishing levels. Papandreou was soon slashing salaries and raising taxes. It wasn’t enough. In 2012, Greece defaulted: Its lenders wrote off more than half of what they were owed.

Government borrowing is like Ritalin. At the right dosage it can jolt a lethargic economy out of recession. Overdosing, as Greece discovered, can bring on seizure.

In recent years the world has seen examples of both. To understand where the United States is headed, it helps to look at where it started.

At its birth, the United States was a fiscal pariah. It was in arrears on loans taken to pay for its war of independence; the Continental Congress had printed money to pay for its debts and paid soldiers with IOUs.

Government borrowing is like Ritalin. At the right dosage it can jolt a lethargic economy out of recession. Overdosing, as Greece discovered, can bring on seizure.

Alexander Hamilton was convinced that a great nation needed sterling credit and so set about ...