Skip to content
Subscriber Only
Noah Smith

Credit Gets You a TV, Not Economic Growth

Everyone seems to believe that easy and expanding credit fuels economic growth, even though there's no proof that it does.
Borrowing to buy doesn't make you richer. 
Borrowing to buy doesn't make you richer. 

It's pretty obvious how credit drives my personal household consumption. If I borrow, I can get a nice big TV and a new car, but eventually I'll have to skimp to pay it back. In a way, the consumption-fueled borrowing binge is an illusion of wealth -- after all, borrowing doesn't increase my salary. Pleasure today means pain tomorrow.

Lots of people seem to think that national economies work something like this. Credit, we are told in article after news article, "fuels" or "drives" growth. Bridgewater Associates founder Ray Dalio, possibly the most successful macro investor in human history, makes this claim in his famous video, "How the Economic Machine Works." The post-Keynesian economists, a heterodox school of thought exiled to the academic wilderness, have a perspective similar to Dalio's. On the other side of the political spectrum, the Austrians -- another exiled heterodox bunch -- believe something similar. Google "credit fueled economic boom" and Austrian Business Cycle Theory is one of the first results.