Explore Freedom

Explore Freedom » What’s So Bad about the Budget Deficit?

FFF Articles

What’s So Bad about the Budget Deficit?

by

Recently I was discussing taxes with a friend who was praising President Bush for pushing his massive tax cut through Congress. “Sure,” I replied. “But a lot of good it does us when he has simultaneously pushed federal spending through the roof.” I was referring to the projected $540 billion federal deficit.

“Just a minute,” my friend interjected, seeing where I was headed. “There’s nothing wrong with deficit spending.”

“Of course there is,” I replied. “It’s a hidden tax on future earnings.”

“Think of it like this,” he said, somewhat condescendingly. “Did you pay cash for your house? Of course not. You borrowed the money. You went into debt for X amount of dollars, and you have a house to show for it.” Sensing finality, he asked, “So what’s wrong with the government doing the same thing?”

He’s right, of course. My wife and I did not pay cash for our home; we borrowed the money from a mortgage company, which we will be paying back — with interest — for 30 years.

In Economics in One Lesson, discussing the impact of taxes on the economy, Henry Hazlitt wrote that “for every dollar … spent on public works one less dollar [is] spent by taxpayers to meet their own wants, and for every public job created one private job [is] destroyed.” Hazlitt was demonstrating the classic example of “the seen and the unseen.”

Believing it has found a way around this problem, however, government employs deficit spending to create the illusion of a “free lunch.”

“Suppose … public works are not paid for from the proceeds of taxation?” asks Hazlitt. “Suppose they are paid for by deficit financing — that is, from the proceeds of government borrowing? Then the result just described does not seem to take place. The public works seem to be created out of ‘new’ purchasing power. You cannot say that the purchasing power has been taken away from the taxpayers. For the moment the nation seems to have got something for nothing.”

When I borrow money to buy a house, I am gaining a definite material value; likewise, when a manufacturer borrows money to invest in, say, labor-saving technology, he also can benefit.

But here’s the clincher: We both must forgo spending on other things to repay not only the debt but the interest on the debt. I may have a new house; the businessman may have new factory equipment — but we have to give that money back, and then some.

We both have to give up a percentage of our future earnings for the privilege of getting the loan today. That means I must calculate the shoes I will not be able to buy for my children, the repairs I won’t make to my car, the entertainment I cannot enjoy, and the savings I cannot set aside for my retirement — all must be considered when committing to financing a home or any other form of indebtedness, which acts as an incentive to temper current spending.

Now, when government borrows money, something different takes place. For government to run a deficit, as Hazlitt pointed out, a sort of “new purchasing power” is seemingly fashioned that allows us to eat our cake and have it too. Bureaucracies are funded and special interests are paid off; food stamps and welfare checks are distributed; wars and occupations are financed; and, if the president gets his way, prescription drugs are made available to the elderly — and all at no additional cost.

“We owe it ourselves,” is the conventional wisdom about the national debt — so we’re to believe that we don’t really owe it at all. Not facing the same kinds of financial realities that restrain private spending, politicians have a gold-plated credit card — and the sky’s the limit. As a result, government keeps on spending and the debt keeps on growing.

Then the bill comes due. It may be 10, 20, or 30 years down the road, but sooner or later all of the money that government spends that exceeds tax revenues — the budget deficit — must be paid back, and then some.

Which means that at some future date either taxes will be raised (they must be raised; if they are not sufficient to cover contemporary costs, then the debt grows; if they are merely high enough to cover costs then government only breaks even; to cover contemporary expenditures plus the debt will require a tax hike) or the printing presses will start up and the currency will be inflated — another, more insidious form of taxation.

So when pressed on the differences between budget deficits and private debt, the answer is simple: Private debt is voluntary, has a limit, and affects only the borrower. Deficit financing, by comparison, is coercive and also a boundless levy cravenly laid on the backs of future wage-earners who are powerless to prevent it. It is $540 billion that people won’t be able to spend on their own homes, children, automobiles, leisure, and savings.

Talk about taxation without representation.

  • Categories
  • This post was written by:

    Scott McPherson is policy adviser at The Future of Freedom Foundation. An advocate of the Free State Project, he lives in Portsmouth, New Hampshire.