DO DEFICITS MATTER?
By Dan Denning
Do government deficits - and by extension, government debt
- matter? I would argue that they do. In fact, over time,
they erode the long-term ability of an economy to create
wealth... making the pie smaller for all concerned.
Government deficits are unique in the world of debt. The
government doesn't borrow money to create income-producing
assets or make capital investment. The purpose of
government borrowing is not to create wealth, but rather to
redistribute income. And because the government pays off
its bonds with tax revenues which it commands from citizens
under threat of imprisonment, it's able to borrow at much
lower interest rates than the private sector.
To the extent that non-productive government borrowing
crowds out productive, private investment, the economy is
in trouble. But how do you measure the size of the deficit?
At what size does it begin to matter?
If you measure government deficits as a measure of GDP,
they may not seem historically large. But that is not the
main issue - rather, the key economic question, in terms of
sustainability and capital formation, is how large
government deficits are as a percentage of gross saving.
How much is the government claiming from the pool of
available funds? In other words, to what extent is
government borrowing crowding out private investment and
capital formation?
In the 1970s, the federal deficit was 11% of private
saving. By contrast, last summer, the projected federal
deficit of $304 billion was just under 20% of gross saving
of $1.5 trillion. Today, with this year's projected federal
deficit of $521 billion and gross savings in 2003
(excluding December) of $1.8 trillion, the federal deficit
is nearly 30% of gross savings. That is an outrageous
ratio.
In short, the higher the debt - and the deficits - the more
the government has to go into capital markets. Using its
coercion-protected franchise as the "payee of last resort,"
it attract funds from savers into its Treasury bills and
bonds that otherwise would have gone into corporate stocks
and bonds, thereby creating wealth by financing new job- creating enterprises. Instead, the savings, once sucked
into the government's vortex, are mostly squandered in
wasteful and ineffective enterprises. (Hey, let's go to
Mars!)
Government borrowing diverts savings away from productive
investment and towards simple wealth redistribution. Over
time, capital formation slows down... and so does business
investment. The long-term ability of the economy to create
capital and wealth is hollowed out.
That's my main economic argument against government
deficits. But my most serious bone of contention is moral.
The more content we are with regular government deficits,
the less responsible we become for ourselves. Borrowing
increases actual indebtedness... but it increases
dependence, too.
People get used to expecting things to be paid for and
provided by the government. Once created and funded, how
many government programs have gone away? Very few. These
programs develop a constituency of bureaucrats whose
paychecks depend on them, and/or taxpayers on the receiving
end of the wealth distribution.
The whole exercise in democracy then becomes a shameless
debasing game of looking out for your piece of the loot at
the expense of your neighbors and friends... and your
children and grandchildren.
The root of this argument is that public debt - debt taken
out in the name of the people and not by an individual or
corporate risk taker - quickly becomes a creature of the
political process and winning elections. In time, this
becomes corrosive to private morality.
A useful example is provided by the heat wave experienced
in Europe this summer. In France, fifteen thousand people
who survived the depression and World War II died in their
homes or unattended in hospital beds from the heat. Their
doctors, neighbors, and children were at the beach, on
vacation, confident that the tax dollars they spent were
taking care of their loved ones.
When Chirac gave his speech to the nation addressing the
human catastrophe, he said that no one person was to blame,
but that all of France was to blame. That's pretty
convenient. All of France means not me and not you but all
of us. So let's just do better next time.
Maybe in their private moments the children and neighbors
of these people do blame themselves for subcontracting
their responsibility to take care of their elders to the
government. And then again, maybe they don't. Maybe the
cumulative effect of letting the government become the
moral middleman is that you don't care about anyone but
yourself anymore. You care about your job, your leisure
time, your life. You work less, have fewer children, and
stop believing in God.
It may be a stretch... but I think it all starts the moment
we accept that spending more than we earn - as a nation,
through our government - is morally tolerable. If it's not
good for a private household to do it, not good
economically and not good morally, why would it be better
for the government to do it?
Lots of people will claim that only the federal government
can and should spend money on things like wars and self
defense. Perhaps. But in addition to being controversial,
it's a bit of a red herring. Right now, for instance, are
we really in a war in which the bulk of our national
resources ought to be dedicated to the military to the same
degree as they were in WWII or the Cold War? And even
so... it's the non-military, non-discretionary spending
that's busting the budget anyway.
Seventy percent of government spending is locked up in non- discretionary promises to pay for things the government
does now, but which used to be done by families, churches,
or the private sector. We have cast these promises in
political granite and have closed the discussion of whether
we ought to or can afford to keep making them.
I would suggest that we not treat our economics as mere
mathematics. Economics used to be called moral philosophy.
The study of the choices people made with their money
couldn't be separated from whether the choices themselves
were "good."
The market judges "good" by whether the good or service you
provide makes things better for people. If it does, you get
rewarded for your risk. If it doesn't, generally, you fail.
Debt isn't immoral per se. But taking on debt you have no
intention of repaying is.
And doing so in the name of the "State" or the "people" may
give you the political cover you need to explain away your
recklessness. You disguise it as concern for the "public
good" or for "society." But morally speaking, when you
sanction it, you're contributing to the impoverishment of
your economy... and the debasement of your own morality. |
