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
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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? |
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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.
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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. |
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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
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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:
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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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