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What Social Animals Owe to Each Other

Friday, October 22, 2021

TGIF: That Bloody Government Debt

The government's attraction to borrowing is hardly a mystery. If the politicians had to extract every dollar they wanted to spend directly from the taxpayers, they might have a revolt on their hands--a bad career move for sure. Borrowing tends to make people more tolerant of bigger government than they would have been otherwise. After all, much of it looks free. They might scrutinize spending programs more closely if they paid the full price out of pocket. Thus forbidding borrowing and related central-bank inflation would put a lid on spending. That's why that program won't fly.

As Jean-Baptiste Colbert, the finance minister under Louis XIV, notoriously put it, “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” You can see the advantage to politicians if they can cut way down on the hissing by borrowing what they'd otherwise have to obtain by plucking. This is what the admired art of governing comes down to.

Of course the government's ability to borrow depends crucially on its power to tax. Avoiding present taxes implies offsetting future taxes when interest or principal is due. (More borrowing can finance those payments, but eventually...) Who would lend to a "government" that could not tax its subjects? (No true government lacks the power to tax.) Let's face it: the state without taxation does not have a promising business plan to present to investors. But the "legitimate" power to steal changes everything; it makes for comparatively safe investments for bond buyers, one that unfairly competes with private alternatives. (Legitimate in this case means "in the eyes of most people"; it's a subjective, not an objective, feature.)

To get the data out of the way: a quick survey reveals a national debt approaching $29 trillion against a GDP of over $22.5 trillion. The government borrows to cover its annual budget shortfall, which in FY2021 came to $2.8 trillion (pretty much like the year before). The government had been expected to spend $6.8 trillion in that fiscal year. The debt of course carries interest payments, which in FY2021 came to $562 billion. That's a fairly large budget item, though it lags behind Medicare/Medicaid, Social Security, and the global empire.

Some people believe that what the government finances by debt is actually free. But how could that be? "We owe it to ourselves," is one answer to that question. That leaves out foreign debt holders, but that's just the beginning of the problem with that glib slogan. How can anything really be free?

In fact government borrowing creates both present and future burdens. In the present, as the George Mason University economist Donald Boudreaux points out, by borrowing money for its pet projects, the politicians channel scarce resources away from where consumers would have signaled producers to direct them. Some people clearly like those pet projects, but many or most would not willingly pay for them either because they deem them too expensive or objectionable at any cost. (The empire is a good example.)

In the unmolested marketplace, producers earn profits by satisfying consumers better than their competitors do. That is accomplished by looking for (scarce) resources that are being used less effectively in that regard than they might be. Through their buying and abstaining, consumers let the producers know if they've made good decisions. Profits signal success, and losses signal failure.

The government, as everyone surely knows, works on an entirely different principle; taxpayers aren't allowed to say no, and so as consumers they are worse off. Political accountability, such as it is, pales in comparison to market accountability.

The politicians may tell themselves that they serve everyone, but what they really do is serve themselves and their careers by distributing booty to select constituencies so they will keep those benefactors in power. The beneficiaries will be thrilled with the deal, but what about everyone else? That's the present burden.

In the future another burden falls--this time on the taxpayers who have their money taken to pay principal and interest on the debt. Funny how the advocates of government debt conveniently forget a favorite slogan they trot out in many other contexts: "Think of the children." Spending money today by creating fiscal obligations for kids too young to vote and even the unborn hardly sounds like compassion for the children. And because the government consumes rather than truly invests, future generations will be poorer than they would have been had the government left the resources to market-based decision-making. That's cruel. (We can only hope that those future generations will repudiate the debt and resist the taxes bequeathed to them.)

So government debt activates two intra-generational transfers: one now and another later. In addition, the government's debt-financed activities today make future generations poorer than they would have been. 

We don't owe the borrowed money to ourselves. That's corporate, collectivist claptrap. People are individuals with property and subjective values. If A is forced to give a dollar to B, we can't seriously believe that the A/B's collective situation is uncharged.


Anonymous said...

When it comes to the environment progressives say we have to think of future generations. But when it comes to all the debt that is piling up any concern for future generations evaporates. What hypocrites. Deficits don't matter. Yeah, right. And the tooth fairy is real.

Economart said...

Hello Sheldon,

So public debt is the primary issue?

I thought government waste of resources would have rung that bell, but apparently not.

Let us say the US Fed Government is going to spend $5 trillion in one year. If it borrows the funds solely from resident citizens, the debt is passed along to future generations along with the asset or bond. In the future, as you admit, an exchange shall occur. $5 trillion plus interest shall transfer from one group of residents, taxpayers, to another, bondholders. I realize future taxpayers are worse off, but as future resident bondholders are enriched by the same sum, nothing in the aggregate is altered in the transaction. A debt and asset of equivalent value are erased and one group of citizens benefits at the other's expense.

So what was the benefit of paying off the public debt in that community? There was none, but the cost in taxation was immense as you admit to its deterrent effect.

Let's say the government taxed the $5 trillion. Is that not $5 trillion less that one passes to one's heirs? Are not future residents deprived of those funds and all returns such funds would have generated?

It would not matter much if public expenditures were confirmed as worthy and wealth creating, but we have no such measure of a good government expenditure. We know something of the costs, but little if anything of the benefits. One would think a proper inquiry should be made to discover the benefits of paying able bodied to stay idle at home. Would they surpass all costs? I doubt it!

Let's say that 80% of public expenditures go to waste. I think it more, but let's settle on this figure. $5 trillion taxed means $4 trillion in resources wasted in the here and now, inflicting great financial injury on those in the present, and an injury that carries along to their heirs through the erasure of wealth and all the returns that wealth would have generated.

If borrowed, the same impoverishing outcome in loss of resources and yields on those resources, though the debt and equivalent asset endures until a future settlement that is all cost and no benefit as demonstrated above.

Let's imagine that government abolished Taxation in all its forms and decided to borrow every dime spent from resident citizens. How would the government leaders treat their perpetual and petulant public bankers? A hell of a lot better than they treat taxpaying slaves.

Sheldon Richman said...

Economart: Did I say that debt is primary? I thought I said that without taxation the government couldn't borrow because who'd lend money to it? That would make taxation, not debt, primary. But both are important.

Economart said...

Yes, you did say debt is the primary problem. In fact, it's the title of your article.

Economart said...

So why would the residents of a community prefer to lend funds to its government rather than submit them by confiscation?

Well, the deterrent effect of Taxation, which you concede is a problem, would disappear. No need to pluck the feathers anymore. Thus, the economy would grow at a unprecedented rate. Let's say from 100 units of production to 130. And because the government must beg for funds, wasteful public expenditures would disappear.

So enriched, from a nation producing 100 units with 40 confiscated by government to a nation producing 130 units with perhaps 10 going to government.

The simple calculation is that wealth created would rise to 120 units from 60.

That wealth shall create returns far exceeding the debt costs. Has abolishing Taxation increased the public credit? Oh yes. So more if the public lender bond holdings are more secure with the creation of such wealth, who cares if the community has its government repay the debt?

Sheldon Richman said...

I thought the title reads "The Bloody Government Debt."

Sheldon Richman said...

You ducked my question. I didn't ask about people's preferences with respect to taxes or debt. I asked why would people lend if taxes were banned, which I favor.

Economart said...

Hello Sheldon

I didn't say a government could not tax. I simply demonstrated that repaying public debt is all cost and no benefit for the community's residents. So why perform X when the costs far surpass the benefits?

Banks have not repayed 1 dime they have ever borrowed. Liabilities rise through the years. That's because the cost of repaying the debt is greater than the benefit.

Always repay the lender, but repaying the debt demands different calculations.

Economart said...

And your title isn't Bloody Government Waste.

Sheldon Richman said...

I'm sorry for not writing the article you were meaning to write.

Economart said...

I have no problem with the article and title. It is you who disputes what the article is about.