Benefits Street.

Simon Jenkins’s article in today’s Guardian, “The truth is that we are all living on Benefits Street”, falls for the old myth that public borrowing enables us to pass on the cost of public spending to the next generation.

I have a huge amount of respect for Simon Jenkins: he understands more about economics then 99% of politicians and most professional economists, but he is wrong on the above public debt point.

In the simple case of a closed economy (that’s one that does not engage in trade or any other transactions with other countries), public borrowing simply means that one lot of citizens (the relatively well off or cash rich) sacrifice current consumption so that government CAN CONSUME. That is, GENERATIONS have nothing to do with it.

Indeed, it’s a physical impossibility (never mind the economics) for people in the future to make sacrifices that benefit those living today: for example, the blood sweat and tears needed to make concrete and steel so as build say a bridge and which is produced in say ten years’ time cannot be consumed today. That would involve time travel.

As to OPEN economies (in particular where public debt incurred by country A can be bought by citizens or organisations in countries B, C, D, etc.) they are slightly different. Obviously if country A is loaned money by other countries and pays it back in say 20 years time, then those living today in A will benefit at the expense of those living in 20 years time. However, those sort of cross border debts cancel out, roughly speaking. That is, for every dollar of US public debt held by UK citizens or organisations, there is roughly a dollar of UK public debt held by US citizens and organisations.