Good and Bad Debt

Woody Brock, author of American Gridlock: Why the Left and Right are Both Wrong - Commonsense 101 Solutions interviewed at the New American Foundation May 8, 2012

Horace Wood Brock, known as Woody Brock, is probably one of the most critical thinkers in America that few except important policy makers and global corporations have ever heard of. I know he hob-knobs with the former because I saw the photographs at his home a few weeks ago when I was invited as part of a group. His website about his business, Strategic Economic Decisions, declares the other.

Brock lives in a remote location near an historic town in Massachusetts. I would say it is no exaggeration that a scout would be needed to find the place. In our case, we had a curator from the Boston Museum of Fine Arts. Brock is a well-known collector of Regency period furniture (made in England roughly 1790-1840) and in the future, a new gallery at the Boston Museum of Fine Arts will include many of his pieces.

What impressed me more, though, was his analytical mind. He collects antiques with precision as he explained to our group for about 45 minutes. That session inspired me to investigate further. Brock applies the same principles to his advisory firm where he evaluates risk using mathematics, game theory and other disciplines. He has an MBA from Harvard University and a PhD from Princeton University — so he is not only equipped to pontificate as he does, but it appears easy for him.

To me, Brock’s most potent argument from his book is his discussion of debt. He says it isn’t necessarily toxic because there are two kinds: bad and good. His arguments make sense and throw a whole new light, I believe, on what the United States could be doing.

“We’ve been naughty,” says Brock. He explains that we are investing in a bad deficit. A good deficit pays for itself while bad does not. The latter pushes debt forward to our children on which they may default. Good debt involves public investment through private corporations that are appraised by an independent bank regarding the rate of return of the capital. Private companies do the work.

Brock continues further and explains that if you borrow just to keep the government going rather than putting the money in something that produces jobs and can make a return, it is bad debt. Transfer payments don’t work. Multiplier payments do.

This is what he says in his own words when interviewed for his book on Amazon:

Question: “Can you elaborate on your definition of a “good” and “bad” government spending deficit?”

Answer: “Because of decades of deficit accumulation, total debt has grown to a dangerous level causing bond markets to look askance at further debt growth. Suppose that a government with a heavy debt load proposes to borrow additional funds. Deficit hawks will cry ‘Foul,’ due to the fear of further displeasing the bond market, and laying even more debt upon the shoulders of the children and grandchildren who will have to service this debt.

But such hawks may be wrong in their diagnosis. Suppose that the funds are being borrowed for productive infrastructure investment — projects like the interstate highway system that more than pay for themselves over time. Not just infrastructure investment (‘roads to both somewhere and nowhere’), but productive investment (‘roads to somewhere’ only). In this case, the high return on such projects will end up lowering the debt burden on the children in the long run. On the other hand, increased borrowing to fund transfer programs will not generate healthy as there is, in effect, no investment to earn returns. This form of borrowing will increase the burden on the children, and the fears of deficit hawks are well justified. In short, there are good and bad deficits — the distinction depending upon whether the borrowed funds are spent productively or unproductively.”

We have lots of unsung heroes in America. Brock may be one of them.