A very annoying meme

There is a number of extremely ignorant claims concerning past and present of Polish economy floating around in public space. Some of them are claims that glorify economic past in order to criticize Poland's present policies (see, for example, my post about the quite common belief that joining EU has turned a vibrant, booming economy into a smoldering wasteland). Some of those arguments go even further: they glorify not just the early nineties, but actually try to convince us that some aspects of Poland's economy in its communist days are superior to what goes on right now. (To add another layer of incomprehensilbitity to this picture: it is usually the Polish right who glorifies communism in this way.)

One of the most widespread claims of this sort is one saying that Poland's external debt is now much higher that it has been in the old days of communism, which means that our rising income is just an illusion, because it has been obtained through loans that can't be repaid. The claim is usually followed by quoting numbers: for example, that Poland's external debt stood at about $26 billion in 1980, but in 2008 was as high as $243 billion. The quoted numbers are actually correct, so the comparison does look catastrophic. But it only looks catastrophic to someone who doesn't know the first thing about how the structure of Poland's external debt has changed, and doesn't have the common sense to realize that comparing debt is quite meaningless without also comparing income.

Let me now talk about two major ways in which this claim is stupid.

First, apples and oranges. Even though, when browsing Poland's macro data, you will find a column titled "Debt, External" both in 1980 as well as in 2008, the numbers you will see in those columns are not values of the same variable. Here's why. External debt can be public or private. Public debt is debt incurred abroad by Polish government agencies (both central and local) by taking out loans, issuing bonds and whatnot. Private debt is debt owed abroad by Polish businesses and individuals. Public and private debt are two very different beasts altogether. The amount of private debt owed is outside of government's control. Whereas the entire stock of public debt is really owed by a single entity (the state), the stock of private debt is owed by millions of individuals and firms. In addition, while it can be argued that the government has an incentive to borrow indefinitely, this incentive is absent in businesses and individuals.

To put it differently, private debt is Polish debt, but it is not Poland's debt.

Here's a very important fact that those who say our debt has grown since 1980 conveniently ignore: In 1980, Poland had no private external debt. The entire economy, including foreign trade, was nationalized, so the whole $26 billion was owed by the government (a.k.a. the taxpayers). Given that, the 2008 statistic that those $26 billion should be compared to is not the entire external debt, but public external debt. How much was that in 2008? About $70 billion.

All of a sudden, the comparison looks a lot less catastrophic. But this is only the beginning. A much more outrageous stupidity of the claim that we owe more now than we did back in 1980, is talking about debt without mentioning income this debt is being paid out of. Unfortunately there is no reliable data on Polish government revenue in 1980, so the relevant incomes cannot be compared directly; however, it's rather uncontroversial to say that government receipts are very strongly correlated with GDP. In 1980, Polish economy was worth about $58 billion. In 2008, it was worth about $420 billion. In 1980, Poland's external public debt was about 45% of its GDP. In 2008, it was about 17%.

Suppose Adam owes $10,000 in loans and Madison owes $30,000. Which one of the two is more indebted? If you have any common sense, your answer to this question will be: "I don't know; not enough data. To answer this I'd need to know how much they make." And if I told you that Adam makes $22,000 a year while Madison makes $177,000, would you say that Madison has more debt than Adam?

Sometimes I hear a mutation of this claim which says that it's Poland's public debt that's now higher. Assuming that those who say this actually know what they're talking about (as in, know the difference between external debt and total public debt), this one is a bit harder to disprove. The reason is that total public debt includes internal debt, and communist Poland officially had none. However, just because it's harder to disprove doesn't mean it makes more sense. Communist Poland didn't have any internal debt on the books not because it didn't collect money internally, but because it was a dictatorship. Communist governments did not have to sell bonds to or take out loans from their citizens, the way normal countries do. Whenever they wanted money from their citizens, they would simply take it. They'd do it by either raising prices (most of which were controlled by the government), decreasing supply of goods and services (most of which were produced by the government), or by inflating currency (which the government could just print without having to worry about pesky obstacles such as independent central banks). If you ignore this fact, then you are either too young to remember anything about communism, or simply have no idea what you're talking about. Or both.

Poland's public debt is now about 50% of its economy. That's high, and in the long run something has to be done about it. But, even though the exact number is not known, it's safe to say that in 1980 that percentage was much, much higher. The enormous hyperinflation that happened in Poland after wage and price controls were lifted suggests that the communist government was essentially in default long before it had actually collapsed.