Friday, 26 April 2013

Butler on Smith on government debt and growth

The relationship between government debt and growth is much in the news right now but worries about the relationship between them are not new, Adam Smith worried about the issue.

In his book "Adam Smith - A Primer" Eamonn Butler writes that Smith ends his "An Inquiry into the Nature and Causes of the Wealth of Nations" with a warning about the effects of a large national debt (see the Wealth of Nations, Book V, Ch. III). Butler explains,
By issuing debt, governments draw capital away from investment and growth, and steer it towards present consumption - in the shape of government activities - which means that growth necessarily falters. In addition, government borrowing allows politicians to take on more functions and boost their power, without having to ask the people for more tax. And they often find ways of avoiding repayments anyway. For these reasons, national debt is not just a benign transfer from one group to another: it is a real threat to liberty and therefore a real threat to prosperity. (Butler p.71)

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