Many seem to have a misconception of borrowing, especially government borrowing, calling it borrowing from our grandchildren. The latest was "Road to ruin could be a high-speed rail track" (Star Tribune, Jan. 24). "Borrowing from our grandchildren" could be a good thing or a bad thing, depending on circumstances.
There are two kinds of borrowing - short term and long term. Short term is to help smooth bumps in income or is for convenience. Long term is to pay for something that you need now but will not have sufficient cash for a long time. We all use both kinds: individuals, businesses, and governments. Each can be abused, but credit is something that makes modern society work more smoothly.
We put purchases on credit cards rather than walk around with a pile of cash. Many hotels and car rental agencies will only accept credit cards. Businesses take inventory loans to have sufficient stock. Why do you think there are sales? To raise the money to pay off the inventory loans. Governments borrow to smooth the cash flow for payrolls and other day-to-day costs because tax payments come in spurts.
We buy our cars and houses with loans. Some think we should save sufficient money rather than borrow, but where is our money going? To a bank who will lend it to somebody else. Meanwhile we're paying rent for housing. Businesses take out loans to buy new equipment or build new facilities. If they waited until they had sufficient cash, they may lose many business opportunities. Likewise, governments borrow to purchase equipment and build roads and bridges. If they waited until they had saved enough cash, people would complain about the cash hoard and the lack of roads and other infrastructure.
The abuse of borrowing comes when short-term borrowing becomes long-term borrowing. If we spend more on credit this month than we can pay next month, we are pushing our borrowing to long-term. Sometime this is unavoidable. We may be laid off unexpectedly. Businesses might not have the expected sales. Tax revenue could be less than predictions. But if spending more for short-term goals gets out of control, interest alone can make matters even worse. In the case of government, this truly becomes taxing our grandchildren for our own benefit.
But we aren't necessarily taxing our grandchildren for our own benefit to build and maintain infrastructure. The infrastructure may well last long past the lifetime of many current taxpayers and be available to their grandchildren. Are any of us today paying the taxes for all the county courthouses, fire and police stations, the sewers, schools, and many other government facilities? Shouldn't we pay for them? We are benefiting from them.
We are if they have been built recently and were built with borrowed money, money that may have been borrowed before we even started paying taxes. Similarly, by borrowing today for infrastructure that our children and grandchildren will benefit from, we are asking them to foot some of the bill. If we don't, neither we nor they will have a modern society.
