Borrowing: for profit, not loss
RECENTLY Lord Stockton, formerly Harold Macmillan, now doyen of Great Britain's ex-prime ministers, made an outstanding speech in the House of Lords. A ``Keynesian'' himself, Lord Stockton extolled the virtues of borrowing to prime the pump at a time of recession. There's nothing wrong with borrowing for production, he declared. It's the natural and proper way to start and to run a business (and, by inference, a country). He pointed out that President Reagan's first-term deficit has been accompanied by a great increase in employment in the United States and a remarkable reduction in inflation.
Even Labour politicians like Denis Healey, former chancellor of the Exchequer, and Neil Kinnock, present party leader, cite President Reagan as the great exemplar of the virtues of high government spending. (Silence has since descended following the President's declared intention to balance the budget in his second term.)
But to Margaret Thatcher and her chancellor, Nigel Lawson, the former ``Supermac'' finished his speech on borrowing too soon. Had he taken it further, they would agree, he would certainly have noted from his own experience that while borrowing for business growth is one thing, borrowing for lossmaking activities, borrowing for jobs that cannot be sustained, borrowing to swell a bureaucracy, and borrowing at interest money that can never be repaid is something else again.
If one looks around the world, most of our financial difficulties derive from profitless borrowing. Poland, a Communist country, has borrowed so much from the West to finance its lossmaking industries and agriculture that in strictly commercial terms it could well be considered bankrupt. Many, perhaps most, of the countries of South America are seen to be in a similar situation. Had the borrowing provided for business growth, had it produced profits, all these countries now would be rich. Instead, their indebtedness threatens the entire financial world. One false move and the international banking system could be brought close to collapse.
There is also a second danger in this matter of debt. If in any country an increase in the money supply can be got only by government borrowing regardless of its viability, will not even the most sophisticated economy become inherently unstable?
Were this not the case there would be no instability, no poverty, no unemployment anywhere in the world. There is nothing easier than for a government to increase its deficit in a good cause. Everyone would be doing it -- and profiting from it. As it is, most governments are doing it and becoming insolvent as a consequence.
The fact is that there is always a limit to the amount of money a government can spend on noncommercial projects and on subsidies. But there is no such limit to the number of financially viable projects and businesses a country can enjoy.
The ``secret'' of prosperity, Chancellor Lawson argues, is that every economic activity that can pay its own way should do so.
There is, however, a further cause of chronic instability in the economic world. It is the current height of taxation. Taxes raise costs and prices. This unbalances demand and may cause unemployment. To fight unemployment money may then be created, ensuring at second hand that the higher prices can be paid. If the money is created by borrowing at high rates of interest, inflation can scarcely be avoided. (In Britain today taxation takes 43 percent of national income. A few years ago the proportion was nearer 50 percent.)
Mrs. Thatcher and Mr. Lawson argue that what Britain most needs -- and indeed what the financial world most needs -- is an acute understanding of the dangers when a country turns to profitless borrowing as a main source of economic growth.
As Lord Stockton said, borrowing for profit needs to be encouraged. But as he failed to say, borrowing for loss is the road to ruin.
John Allan May is a longtime analyst of British economic affairs for the Monitor.