| Do Deficits
Matter? |
| How Does
Government Borrowing Affect The Long-Term Viability Of An Economy? Is It
Even 'Moral' To Borrow - If You Don't Intend To Settle Your Debts? Strategic
Investment's Dan Denning Weighs In With His View On The Matter, Below... |
| 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. |
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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.
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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. |
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| 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. |
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| 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. |
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| 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. |
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| 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.
Regards,
Dan Denning
For the Daily
Reckoning
Dan Denning
is the editor of Strategic Investment. He is currently researching the
calamitous effects a correction of the U.S.'s "twin deficits" would
have on the economy. If you'd like to learn how this relates to you as
an investor, and how you might profit from an imminent deficit blow-out,
see Dan's report:
The Other Twin
Towers
An expanded
version of this article was originally published in a special report, "Does
U.S. Government Debt REALLY Matter?" from What We Now Know, a new weekly
e-letter from Casey research. Access the report. |
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