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Is Every Democracy Destined for the Problems of Greece?

April 25, 2012

From, mirabile dictu, Harvard Business Review:

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…

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.

One Comment
  1. January 4, 2014 2:25 am

    Hello there! Do you use Twitter? I’d like to follow you if that would be ok.
    I’m definitely enjoying your blog and look forward to new updates.

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