What the government spends affects you
At the launch of Banco Azteca do Brasil in late March, some journalists asked about the apparent contradiction in our position against government indebtedness and in favor of financing private individuals, which Banco Azteca logically promotes and facilitates. Given the importance of the topic for Latin America, it is worth clarifying our points of view.
Government spending is not the same as individual spending or investing. In the first place, the typical Latin American government spends a great deal and badly. To bear this out, just compare the enormous tax burden on society and the wretched quality of public services. When the government spends a peso, a real or a quetzal, it spends other people’s money (taxpayers’), and typically is not accountable to anybody or, at the very least, its accounts are not very transparent.
By contrast, when a family spends or invests, it does so with the knowledge of its most urgent needs (food, clothing, housing, school implements, etc.), or, whether or not it can afford a small luxury and what its budget would be for that, or its ability to pay if it decides to take out a loan. In addition, a family knows how much it spends, what belongs to it, and what it will eventually pay: it takes all the responsibility and assumes the complete cost of its decisions.
Often governments think they better know what families need than the families themselves; but this is seldom the case. There are certainly services —public services— that only the government can provide or contract out efficiently. However, there are many goods and services that are by nature strictly private that the government insists on producing or distributing (for example electricity, gasoline and even school uniforms), thus squandering society’s resources. Our countries cannot enjoy the luxury of waste. Given the high price of basic products, including oil, many Latin American governments have more resources than ever, but the quality of services has not improved.
If the government goes into debt —and frequently it does— the problem escalates; the costs of poor spending today are transferred to future generations. By contrast, when an individual goes into debt, it doesn’t matter if it is to finance his immediate consumption or to buy a durable consumer good; he knows his ability to pay and does it responsibly.
When the public sector absorbs resources, they stop being channeled into other activities and the cost of financing goes up for individuals and companies. This document, Report on Banks up to December 2007 by Argentina’s Central Bank shows an interesting graph that expresses the point:
The graph clearly shows the displacement of resources (that is, what one sector loses, the other gains) from the private to the public sector —or, in the Argentine case, happily, the other way around. If the government takes on less debt, the private sector can be financed more; this graph applies to Argentina, Brazil and Mexico, or even to the United States, where, by the way, the effects of excessive government debt go well beyond U.S. borders in the dollarized global economy.
This effect was documented 72 years ago by John Maynard Keynes; in his most important work, General Theory of Employment, Interest and Money, he called it “crowding out.”
What economists call the transmission variable is the interest rate; that is, if the government takes on more debt, the interest rate rises and individuals and companies have less financing ability for investing in machinery, equipment or durable consumer goods. It seems that seven decades have not been enough for many finance ministers to learn the lesson.