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In Praise of Debt Ceilings

MUNICH – The wrangling about raising the US government’s borrowing limit – now thankfully over, at least for a few months – underscores the hazards posed by excessive state indebtedness. Governments nowadays are essentially running gigantic redistribution machines that steer funds from taxpayers to transfer recipients and other beneficiaries of public expenditure. The latter permanently ask for more, while the former zealously try to defend their purse.

In the end, the solution to this “redistribution battle” tends more often than not to be found in more government borrowing. For today’s democracies, the fact that those who will eventually have to pay the taxes to service the resulting debt cannot yet vote makes borrowing the most expedient way out of a messy political battle.

The lure of borrowing becomes irresistible if it can be assumed that the burden might be shifted to population groups other than those benefiting today from low taxation or higher public spending. That is, for example, the case with childless people: they benefit from public borrowing and manage to shift to other families’ descendants the part of the debt service that will fall due when they are no longer around.

Only insofar as parents, taking into account the interests of their children and grandchildren, participate in the political process can the borrowing addiction be kept in check. If this is what motivates the Republicans’ hardline stance in the ongoing US redistribution battle, then theirs is a worthy cause – that of attempting to protect their descendants from being exploited. From this perspective, the Republican sentiment underlying the recent debt-ceiling impasse might be just as commendable as, for example, the prohibition enshrined in the German Constitution against debt financing of any sort, which will take effect no later than 2016 at the federal level and in 2020 for Germany’s länder.