Niall Ferguson’s book, “The Great Degeneration,” was enlightening. However, the last chapter seemed to be the most poignant, as it is with most books. He made many good points, but the one that stood out to me was the one dealing with government debt.
In the section “Against Technoptimism” Ferguson begins with the example of the British state in the eighteenth century. “Revolution and war are not new threats. In the eighteenth century the disruptive ideology that grew out of the Enlightenment became the basis for two major challenges to the Anglophone Empire that then bestrode the globe.” In other words, England was fighting wars with the colonies and revolutionary France, which resulted in the accumulation of huge amounts of debt.
The British government borrowed so much money to pay for its wars that its debt level was 250% of its GDP. However, through deleveraging processes the British government was able to reduce its debt burden by 225% of GDP resulting in a manageable debt load of 25%. Some would call this “the most successful in recorded history.” There were difficult times. “This beautiful deleveraging was not without its ugly episodes, notably in the mid-1820’s and late 1840’s, when austerity policies caused social unrest (and failed to alleviate a disastrous famine in Ireland.”
The next question Ferguson asks is, “Can the United States emulate this feat? He states that he doubts it, and gives several reasons why, but one seems to stand out. Vincent Reinhart and Ken Rogoff researched the affects of long-term debt on advanced countries. The question they wanted to answer is what happens with public debt exceeds 90% of GDP? Their research showed that these “overhangs” were “associated with lower growth, over protracted periods of time.” In other words, economic growth ran about 1.2% and did not change for an average of 23 years. Excessive debt takes away from the ability of an economy to grow because it becomes a paradigm. This paradigm involves a belief that deficits are acceptable. We live beyond our means.
What historical events helped the Brits to eliminate debt? A technological breakthrough occurred. The railroad emerged as a new opportunity which became lucrative for England. I think this is similar to the industrial advantages the United States had after World War II allowing us to become the world’s bank. This type of event will be less likely to happen in the United States, thus leaving us to learn how to live within our means. Ferguson states, “My pessimism about the likelihood of a technological deus ex machina is supported by a simple historical observation. The achievements of the last twenty-five years were not especially impressive compared with what we did in the preceding twenty-five years.”
I am not too sure that I agree with him on this one. Economic growth is a result of some combination of capital deepening and technological progress. With the advent of the railroad, which was a capital deepening event, as well as technological progress, it is clear that England was able to grow out of its debt problem. However, I believe that in our modern times most of the economic growth in the United States will come from technological progress. This progress will not be new gadgets, although we have our share. Mobile technology has and will continue to revolutionize the world. The new progress will be a result of new ideas fueled by entrepreneurial passion.
Is this anything new? No! But our culture needs to rediscover the value of living simply and within our means. Large levels of public debt are bad for our future, and they are driving us to what is called a stationary state. “Public debt – stated and implicit – has become a way for the older generation to live at the expense of the young and unborn.” Add to that dysfunctional levels of government regulation and we see a stagnant economic system that is teetering on the edge of a ruinous precipice.
I have to end this blog with a quote from Ferguson. “Lawyers, who can be revolutionaries in a dynamic society, become parasites in a stationary one. And civil society withers into a mere no man’s land between corporate interests and big government. Taken together, these are the things I refer to as the Great degeneration.” Hmm, I think he has something here.
And that is my thought for the day, with a lot of help from Niall Ferguson!