Yeah but there's a difference. Companies, and individuals, are not steady state systems as modern states are supposed to be, IMHO. I don't borrow money to buy a car, I only borrowed money to go to University and it's a sensible investment, but I only do that because in the natural evolution of my life, I can safely expect to be much more productive in the economic sense between 25 and 65 than from 20-25.

Why don't states simply levy a little more taxes, just a slight excess, and then, whenever they need to buy a bunch of tanks for the army or want to build a new high speed railway, they have the money in cash.

Because the politicians that force more taxes on people wouldn't get reelected and most politicians are power hungry bastards intent on forcing their will upon the nation for as long as they possibly can while making it look that they are nice and cuddly in order to get reelected.

Redhouse - "I can safely expect to be much more productive in the economic sense between 25 and 65 than from 20-25." I hope it is a good investment, but just because you can 'safely expect' doesnt mean it turns out that way. There are many degree holders with no jobs, others have died, got sick, gone to live on a beech in Thialand etc.

I agree with your central point, save then spend rathar than borrow to spend, but in a competitive world countries don't necessarily have that luxary. Suppose you were elected president for life of Nigeria tomorow. I'm assuming you will sop corruption straight away, but then what? How do you improve the long-term economic and social condition of the country.? One way is to tax you new subjects a little more and then start building roads and hospitals and prisons that the tax-payers will never see complete - or another way is to borrow money, get the economy moving and get quicker results.

Re: Nigeria
Maniac, let's stick to highly developed countries for a moment.

Re: beach in Thailand
I never ruled it out *definitively*

@Red - well then when you get out of university, I hope you live somewhere with a good public transit system or safe biking lanes and that you find a good playing employer there who acceptsthat you will be biking/riding a bus.

And bo is partially correct that the politicians who raised taxes to buy nothing but build up reserves would be run out of town. The government is not a for profit organization and it is accountable to the people. Building up a reserve may sound like a good idea to you (and many of us), but two things would happen: one, the people wouldn't reelect the officials who took their manoey to "bank it for a rainy day" and two, the money would get spent on pet projects despite. The government in general is not good at holding onto money. That's why when there is a surplus it generally goes back to the people in the form of a rebate/tax break.

One additional thing to note is that most taxes are earmarked for projects or specific funds. Recently the city I live in wanted to move just .1% (1/10th of 1%) out of the 1.5% it collects in payroll taxes into a different account with other purposes because the pupose it was originally earmarked for came in under budget and wasn't needing it but another did, so to avoid giving it back then having to pass a tax increase, they came to us voters and asked permission to redirect it. It was a smart move as it passed with more than 90% approval. Had they not done that, they would have had to give us a refund (not a bad thing), but then tried to pass a new tax which may or may not have gone through.

Not all tax money is slush fund money. The feds like to pretend it is, but local and state governments are held to a higher standard of accountability. Unlike you paycheck (if you get one), this is more like the money for your student loan. The people loan it for a purpose just as your student loan is for a purpose and it is fraudulent to use it for anything outside of that purpose.

Now, additionally, because the taxes are earmarked for projects,but because those projects can't usually wait, the governments take out loans. You might wonder "why can't they wait?" It's simple. Many circumstyances can cause them not to wait. PErhaps it is a new bridge because of some disaster befell the old one or perhaps a sports teamis threatening to leave town if they don't get a new stadium. Sometimes it is a matter of a growth explosion (a good thing) means that the infrastructure is suddenly insufficient. But one key aspect to the borrowing is that alomst always the lenders require proof of being able to pay it back, so they have to get the tax passed first for the project *then* they canborrow the money and pay it back over time. But the project cannot wait 5 or 10 years until the funds have come in from the tax.

When you own a house, even if you save for 10 years and buy an inexpensive one for cash, you will discover how things can creep up out of the blue that were never budgeted for and that no amount of savings planning could have compensated for. The government deals with this all the time, so they, like us, borrow money.

One of the reasons I've never heard from a non-economist is the disciplinatory aspect of debt. Just like a corporate manager might squander shareholders' money, a politician might squander the national treasury because the control mechanisms are weak - managers have golden parachutes and politicians can be wed out usually only once per election circle. On the other, if big institutional investors don't like your policies, the interest on the next issue of debt will skyrocket and the whole world will start to treat you like a leper. One of the most cited indicators of health of public finance, investment rating, wouldn't even make sense without countries having debt. Instead of a clearly visible and monitorable debt, a 1% increase in taxes flowing to a budget and diluted into many chapters is much harder to assess - how much of that increase was spend on what, was the increase even necessary (any free money will be inevitably spend because of the political empire building unless the country is filthy rich like Qatar or Norway or has a high level of political culture), stuff like that.

Of course the interests of investors and citizens are not always anyway near similar, so the disciplinary action might be counterproductive to the "national welfare". However, that's always an issue in principal-agent interactions, in this case amplified by an additional layer created by citizens (principal) delegating their control duty over politicians (agents) to yet another party.

Yeah but other than these negative reasons, are there any positive reasons why a country should hold debt?

How do you define a positive reason?

Well the reasons I've heard so far for taking on debt are mainly negative, politicians would get ousted if they didn't take on debt (I doubt that is universally true), if you make a pot of money the next guy will just spend it etc..

Are there any positive reasons? Like, debt is good for society because..?

"Companies, and individuals, are not steady state systems as modern states are supposed to be..."

Whoever said States are steady state systems? By design, the US has the potential for a bloodless revolution every 4 years and can completely overthrow the majority of the government. From a fiscal standpoint, since the government is funded by people and corporations, which you admit are not steady state, the government, therefore, is clearly not a steady state system.

I think in *many* instances (these and others) your basic premises are just wrong.

@Redhouse
"Re: Nigeria - Maniac, let's stick to highly developed countries for a moment"

Why? The principle is the same. Each country wants to advance some need roads and hospitals, others need fast broadband and bullet trains.

Debt is good for society because....it allows investment today that can give everyone a brighter tomorrow. I've already said that a country/company/individual shouldnt borrow to met ongoing expenditure, but building say a fast network system, building a canel system, drainage infrastructure etc are things that future generations will benefit from.

It's not a case of "debt is good for society because..." it's more a case of "debt is a necessary evil in the current system" - for the reasons already outlined.

How about this - I already mentioned it, but debt is good because projects get done in a timely fashion and infrastructure grows, economy grows because with the infrastructure to handle the increased populace comes more spending by the populace as they are now happy with their city/ town, whatever. So a positive out of having debt. K?

Debt is good because there are many positive NPV transactions, and because many costs are too large to be paid up front.

An existing stock of debt is also good because, assuming a country always pays its debt (and for countries like the US, this is not really much of an assumption these days, though I suppose you never really know), this creates a safe asset for investors looking for a place to put their money. If there were no US treasury bills at all, the international economy as a whole would suffer tremendously, and so would many American individuals and businesses.

Governments run up massive amounts of debt because it is the best way to enrich the politicians' puppet masters in the banking industry. Why socialists have no problem enriching the capitalists and giving the bill to the proles through massive government debt and taxes is a mystery to me.

Governments cannot save surpluses for a rainy day because everyone with their finger in the government pie simply demands the surpluses be given to them (and they get them, because no politician wants to alienate voters!). This happened in California during both the Dotcom boom and housing boom - the state ran massive surpluses, which government workers demanded in salary and benefit increases. The result is that many government workers in California now retire at 50 with 90% of their six-figure salary and free health care for life while the state claims it needs to raise taxes (on *everyone*, not just "the rich", who have fled the state in droves) because "there's no money" despite already having the highest tax burden in the country.

Of course, if you have debt to pay off, then budget surpluses contribute to the general welfare rather parochial interests and lobby groups extracting benefits for themselves.

Debt is slavery. It is dismaying to see that so many have no problem with being in debt (and consequently under the thumb) of others, and even think it's a *good* thing.

What's the old proverb? I think it goes, "If you owe a bank a thousand dollars, you have a problem. If you owe a bank a million dollars, the bank has a problem." Debtors are not always beholden to their creditors, and particularly in the case of sovereign debt, debtors often come out on top. There's a pretty funny dispute about Argentinian holdouts from their last restructuring playing out in court right now that underscores how much independence sovereigns have with respect to their debt.

Part of the purpose of debt in a growing national economy is that is can be viewed as free money (I'm not saying I espouse this view, mind you). If you can use *other* people's money to leverage growth in your economy such that the borrowed debt as a *percentage* of national GDP is ever shrinking, then you are leveraging that debt to your own gain. Of course, this supposes that you actually make payment and get rid of the debt, etc. So, really, this is just a fairy tale we tell ourselves to justify bad economic decisions...

In truth, our Legislators borrow money from other countries to *BUY VOTES* with government hand-outs...TRUTH TO POWER baby!!!

By default, I agree with Tolstoy. I find the arguments for it unconvincing, although as a chemist I gladly admit knowing painfully little about the economy. I don't see why in good years wouldn't save up a little money so that in bad years, they can build a couple of roads and schools to stimulate the economy.

Draugnar's argument,

"How about this - I already mentioned it, but debt is good because projects get done in a timely fashion and infrastructure grows, economy grows because with the infrastructure to handle the increased populace comes more spending by the populace as they are now happy with their city/ town, whatever. So a positive out of having debt. K? "

What does that even mean, projects are done in a timely fashion because of debt? Hell if you work for me works get done in a timely fashion with a surplus! And if the economy grows, don't you get more money from taxes? And if that road is so profitable (say, a highway) why don't private investors build it from their own money and let them levy toll on it?

As for ulytau, I find your contributing interesting, but very abstract. I'd be happy to hear more of it.

As for krellin, bloodless revolution? You mean, the one after which a prison camp that would be absolutely closed after the bloodless revolution is still open? The one after which the US economy looks pretty much the same after it would look structurally different? I don't see it.

Anyone who thinks "sovereign debt" is wonderful and governments are always more powerful than the lenders they borrow from should read "Confessions of an Economic Hit Man" by John Perkins:
http://www.amazon.com/Confessions-Economic-Hit-John-Perkins/dp/0452287081

Debt gives you liquidity control, redhouse. Usage fees for infrastructure may pay for a project over ten years, but you've got build it before any of that happens. If you know the usage fees will pay for it, then it's more efficient to pay the initial cost with debt and finance the debt with usage, than to charge citizens twice (with taxes, and with usage fees). Otherwise, like Draugnar says, it is difficult to pay for the project and complete it on time solely with taxes, because many such projects can cost as much as the entire tax base of small jurisdictions. It is only be spreading the cost out over a long period of time that they are possible.

Surpluses are politically unwieldy, so it's not safe to rely on them as a control mechanism for public finances.

Tolstoy, I've read that book and many others. There are obviously many valid points to be made on an IPE perspective about how borrowing money under certain terms can be harmful, and financing large energy projects in developing countries ranks high among them. But broadly speaking, debt is a powerful tool of public finance that is used to by most countries to their own advantage.

I'm asking myself the question: what's the largest unforeseen investment a government could make and how does it relate to its yearly spending. And then I ask myself the same question about my own budget.

War is probably the answer. There are dozens of examples of countries spending multiples of their national income on their military in various periods throughout the last 200 years, though I would hardly defend that as a productive use of debt.

Natural disasters are the other big one, eg, Haiti, Japan.

Well first of all, war is something you can prepare for as well. You can stock ammunition, do research and investments into drones and other equipment that makes war more comfortable, have a stock of bullet proof vests, a trained army etc. I mean, if Germany invades my country (Holland) tomorrow, we stand no chance without international help, but in a great number of cases, you can prepare for stuff to happen. Natural disasters are a good example. We had a terrible one in the 1950s (http://en.wikipedia.org/wiki/North_Sea_flood_of_1953) which won't happen again (http://en.wikipedia.org/wiki/Delta_Works).

I just don't see good reason for a developed country with no acute threat of being invaded, or suffering from a natural disaster, to take on debt.

Why does the core principle of kitchen table economics, "saving a little for a rainy day" not apply to modern government?

You've already been given the reason of positive NPV transactions - if the interest costs 2%, but what you're spending it on brings back (or saves you, etc.) 3%, then you borrow the money. Spending on infrastructure and most capital spending fits the bill as a positive NPV transaction. That's why you very rarely see a large corporation with no long-term debt, and it is usually a bad sign if a big company has no long-term debt - it means their costs are higher than they should be, or that they haven't taken advantage of prudent opportunities.

That's not to say that all debts are because of positive NPV transactions, but a lot of it is. Others in this thread have already pointed out that incompetence, poor planning and corruption play a large role in increasing the debt held by the public. It's tough for governments to plan long-term perfectly, obviously, because things like elections frequently change the priorities and plans of governments.

Yeah I know, but my point is that for these projects (war and floods aren't among them, obviously) for which you can reasonably assume a certain revenue (say, a highway, or a railroad) I don't see why the government should be investing in it at all. If the return on your investment is so crystal clear, why not leave it to the market? They're much better at not being corrupt, taking on debt and sticking to time tables!

They also have much higher WACC for instance.