Rethinking Debt

In the article “Rethinking Debt,” Jared Bernstein discusses about the concept of debt. Bernstein states that over the years, the nation at large has had an understandable fear about debt and borrowing. This great fear about debt and borrowing is because of the role of debt in the Great Recession that the world experienced in 2008. Despite the precautionary measure put in place by people against over borrowing, Bernstein states that it is destructive because it is preventing the nation from recovering from the recession. This is actually true because when individuals refuse to borrow money to inject in various economic activities; these activities remain stagnant or economically unviable. Since during the times of recession people do not have a lot of money at their disposal, they do not have any other way of financing or reviving their businesses apart from borrowing from the financial sector. Borrowing to finance economic activities during the times of recession is a good way of driving an economy from recession. However, if the affected economic activities as well as businesses are not boosted back to the positions they were before the recession, the economy remains stagnant since there are no/few economic activities taking place, whose activities cannot help in circulation of money to the normal levels.

According to Bernstein, policy-makers, who are supposed to make and implement policies that can help a nation come out of recession, seem unwilling to take the necessary actions. All this is because of the fear of deficit spending. A deficit spending occurs when a nation spends more than it earns, or rather, the expenditures are higher than the revenues. Policy-makers seem to forget that for revenue to be generated, money has to spend. Money/capital has to be injected in the vital economic sectors such as health and education in order for a nation to be able to earn sufficient revenue from other sectors. However, with the fear of deficit spending, economic sectors remain inactive. In fact, when the economic sectors are inactive, financial burden is even higher because of the fixed costs incurred. Since there are no activities to generate revenue to cover the fixed costs, these economic sectors continue operating at a deficit. Therefore, lack of spending during the times of financial crisis is not a solution to the problem. Instead, it creates more and more problems.

Bernstein looks at the role of, as well as the threats associated with debt. He states that high levels of national debt should not cause any alarm as long as the nation can service the debt, operates under mature capital market, and it can reliably tax its citizens. However, if a nation cannot reliably tax its citizens, then a debt becomes a national threat. Bernstein further explains that debt is responsible for the many economic developments that we see today. Many people own houses and businesses through debts. If debts were inexistence, then the economy of the world would not be where it is today. Moreover, there are two types of debts, debt/borrowing for consumption and borrowing for spending. Borrowing for spending is usually economical because it has long-term benefits to the economy. However, borrowing for consumptions cannot cause a deficit if it is temporary. Bernstein explains all these in order to make people understand that debt is not always bad.

Based on this analysis, it is clear that debts are not as bad as people think they are. In times of financial crisis such as recession, debts can be used to revive an economy. This is because debts are the only source of capital to an ailing economy. They help revive depressed sectors of an economy, which in return generate revenue that is used to repay the debts. However, when borrowing, a nation should evaluate its ability to service the debt, the efficiency of its tax system, as well as the purpose of the debt (consumption or spending). Similarly, individuals should consider their abilities to service debts as well as the purpose of the debt. Debts are not harmful as long as nations and individuals borrow wisely. Besides, a debt is a partial asset to the debt holder and an asset to the debt owner.

Order now

Related essays