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Good debt, bad debt


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The traffic light government collapsed over the issue of new debt. Germany needs more investment. But should they be financed on credit? When is debt good or bad?

Bianca von der Au

Time is money. This is shown by a look at the debt clock of the Federal Republic of Germany. It hangs above the entrance to the headquarters of the Taxpayers' Association in Berlin. A digital scoreboard – the numbers red on a black background. Every second, 3,225 euros of new debt is added – as of the end of December. The total amount of German national debt amounts to around 2.5 trillion euros.

In international comparison, this still appears to be moderate, because the decisive factor is the debt burden in relation to a country's economic strength – the so-called national debt ratio. With a debt ratio of 63.7 percent, Germany is one of the countries that tend to budget soundly. So should Germany take on more debt? The answer varies depending on who you ask.

Today's debts are tomorrow's taxes

The taxpayers' association warns against excessive new debt and advocates compliance with the debt brake enshrined in the Basic Law.

Debts always have a time dimension. From the point of view of Reiner Holznagel, President of the Taxpayers' Association, debts are “purchased time. In fact, we are postponing many burdens into the future.” Seen this way, today's debts are tomorrow's taxes, warns the Taxpayers' Association, which has installed the debt clock as a kind of warning signal.

If you ask the President of the Taxpayers' Association, there is neither good nor bad debt: “It's the measure and amount that is crucial and even if we allow ourselves to have good debt, it can quickly turn into problematic debt, because of course it does require interest and compound interest.” The then Chancellor Angela Merkel probably meant something similar when she brought the Swabian housewife into collective memory at the CDU federal party conference in 2008. It is considered a symbol and ideal of frugal household management.

The economics is not a Swabian housewife

“The problem is that an economy as a whole is not like the famous Swabian housewife,” says economist, podcaster and non-fiction author Daniel Stelter. “Because: We have three sectors in the economy. We have the state, we have private households and we have companies.” To put it simply, these three determine the economic activity of a country. In Germany, for example, private households will have saved an enormous sum of 7.6 trillion euros in 2023. Savings that are mostly poorly invested, says Christian Kopf, head of pension fund management at the fund company Union Investment. In his view, some of this money could be used for domestic investments. The same applies to company surpluses. From the pension fund manager's perspective, the German corporate sector is extremely profitable and saves much more than it invests.

Keynes versus Friedman

If there is a lack of private investment, the state should ensure the corresponding demand – according to the common teaching of John Maynard Keynes. The British economist, who was born at the end of the nineteenth century, is one of the leading thinkers in economics. He advocated expanding national debt in times of crisis. His opponent Milton Friedman, who wanted to keep government influence on the economy as low as possible, was different. Rather, the state should create good conditions under which companies and private households invest. For example, through tax relief and spending cuts. These two schools of thought are essentially opposed to each other. More or less national debt – in the end that is also a question of political and economic thought.

If Germany no longer believes in itself, who will?

Many companies and business representatives are currently missing good investment conditions in Germany. Also the chief economist of the Landesbank Hessen-Thüringen, Gertrud Traud. “We are seeing private investment being crowded out by government consumption.” At the same time, state investment in infrastructure has been declining for years, says Traud. A large part of the federal budget goes to government consumption, i.e. wages and salaries and social spending. For foreign investors the question arises: “If Germany doesn't invest enough in its own country and doesn't believe in its own country, why should we do that?”

Investing in the future is good debt

Many economists see the issue of debt differently than the famous Swabian housewife. With regard to the state, this means that investments in the country's future are more likely to be good debts. When the state uses it to repair bridges, build new apartments or lay fiber optic cables for faster internet. Economists consider consumer debt that is used to finance ongoing costs to be bad debt.

If you look at Germany, politicians have spent too much money on the wrong things in the past – according to economist Daniel Stelter's thesis. In his 2018 book “The Fairy Tale of the Rich Country,” Stelter criticizes the fact that the responsible politicians simply redistributed the bubbling tax revenue at the time instead of securing prosperity in Germany through investments. “That is, the fact that you can and should take on debt does not mean that it is guaranteed that the debt will be used properly.”

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