Can the government take on good and bad debt?

When it comes to our personal finances, there's a difference between good and bad debt. Taking out loans to fund education -- and invest in the future -- for example, can be considered good. Going on a shopping spree and running up a credit card bill -- well, that would be not so good.

Can a parallel be drawn to the kind of spending the government does?

"There are many examples in our lives where spending has actually contributed to growth," according to Paddy Hirsch, host of the Marketplace Whiteboard series. "So I think that there is good debt and bad debt when it comes to government spending."

Bad debt -- for individuals and governments -- is basically when you spend money on things that won't give you a return on investment, explains Hirsch.

"I like to think of this as the empty calories analogy," he says."It's when you go out and buy things that don't get you anything. You go to the sweet shop, for example, every day for a week, you spend $100 on sweets. By the end of the week you've got bad teeth, it's just a bunch of empty calories in your body, it's not actually helping you in any way."

For the government, good spending also helps you get somewhere -- for example, infrastructure spending. The government might go into debt to build a new bridge, but there are long-term benefits to society.

An example of bad government debt? Hirsch says:  borrowing to create tax breaks -- it's all just empty calories.

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101
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The separation of debt into good debt and bad debt ignores the fact that debt is, for the most part, fungible. If you as an individual buy a house, a car, and a wardrobe in one year and borrow $100,000 for that - which did you borrow it for? Anything you spent on the wardrobe could have been spent to reduce the debt on the house or the car. Two years down the line, how are you to show that the debt was good or bad?

For the government, like with individuals, there's no such thing as good or bad debt. There are better and worse reasons to spend, which lead perhaps to better or worse reasons to borrow. There's debt you can afford and debt that crushes you. But if the government borrows money, how can you say that it's for infrastructure (which you classify as good) or for, say, tax breaks or wasteful spending?

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