Last month, the St. Petersburg Times (that’s St. Petersburg, Russia … not St. Petersburg, Florida!) announced that the Russian Finance Ministry had finally resettled the last of its Soviet era debt.
Soviet era debt? The Soviet Union crumbled almost two decades ago; it seems odd that any entity, including the Russian Federation, is still saddled with its obligations. Nevertheless, the continued existence of the debt, and the length of time that the Russian Federation requires for its repayment, may serve as a warning for our own debt burdened government here in the United States.
Resettled, Not Repaid
Interestingly, the Russian Federation didn’t actually repay its old Soviet debt. Rather, it resettled the debt by converting it into borrowings of the new Russian Federation. In other words, it simply swapped its old obligations to repay the liabilities of its former Soviet entity (which no longer exists) with a new set of obligations.
Thus, the Russian Federation is still repaying debts that were incurred to finance Soviet governmental activities over two decades ago. Was it wise for the old Soviet government to borrow so much money to begin with? And is it now wise for the Russian Federation to continue stretching out its repayment schedule?
The answers to these questions concern the nature of debt and its appropriate use as a financing mechanism. These answers are not solely applicable to government transactions; they apply to organizations and individuals as well.
Debt and Growth
From a purely fiscal perspective, the most responsible purpose for incurring debt is to generate economic growth. Individuals borrow money to finance their college programs, for instance, because they believe that higher education can lead to higher wages. And higher wages can produce the funds to repay those borrowings, with (hopefully) sufficient earnings remaining to finance an improved lifestyle.
For similar reasons, organizations borrow money to finance the development of new products and services. They then dedicate a portion of the profits generated by these new activities to repay the debt, and then dedicate the remaining profits to other initiatives. Likewise, governments borrow money to finance the development of roads, airports, and ports; these infrastructural improvements generate increases in economic activity, which are then taxed to produce funds for debt repayments.
It’s hard to believe, though, that the Russian Federation is still earning taxation revenues from economic activities that were originally generated by decades-old infrastructural improvements. So why does this Russian debt still exist? Why was it borrowed to begin with?
Debt and Maintenance
Apparently, the Soviet government borrowed huge sums of money for decades to feed its citizens and support its global superpower status. For instance, it purchased immense amounts of grain to feed its own people during the harsh Russian winters, and it maintained large military bases in Eastern Europe and central Asia. None of these activities directly generated significant increases in economic activity and government revenues; instead, they were employed to simply maintain the status quo activities of the Russian government and its people.
Some might argue “But by keeping its citizens alive, and by maintaining a global presence, the Soviets were trying to support conditions that could eventually lead to economic growth.” Such an argument certainly has merit; after all, it is similar to the one that the government of Canada employed to justify the incurrence of $1.6 billion of debt to finance the development of Montreal’s Olympic Stadium for the Summer Olympics of 1968. Nevertheless, Canada didn’t repay that debt for 30 years, by the end of that period, any direct economic benefits that were derived from the two week Olympic experience had undoubtedly long since passed.
The likelier motivation for the incurrence of Soviet debt was one of simple maintenance, i.e. “our people are alive and we simply must feed them,” and “our empire is a strong and global one, and we simply must support it.” To be sure, those are all certainly valid – and, in fact, highly humane – arguments. Yet, without subsequent growth in economic activity to generate taxation revenues, it was inevitable that the Soviet Union’s repayment obligations would stretch over a long, long, long time.
The American Experience
So let’s apply these observations to the $12 trillion of debt that America has incurred through the issuance of Treasury bills and other government securities. Is the United States using this debt to build 21st century bullet trains? A modern, digital air traffic control system? High speed, wireless internet access available throughout the nation?
Although a relatively small portion of the federal stimulus package is being invested in such economic development initiatives, most is being spent on an eclectic assortment of education, health care, tax reduction, and state budget relief purposes.
On the one hand, it is valid – and, again, highly humane – to argue “we must continue to educate our citizens,” and “we have public health clinics that need refurbishment.” But if such activities aren’t likely to lead to direct economic growth, the repayment period on America’s new national debt is likely to stretch over a long, long, long time …
… just as it has done for our comrades in the Russian Federation.