Pondering my latest disagreement with John Tamny on deficit financing of government spending, I now realize that I did indeed misunderstand his argument. My misunderstanding was a careless, if innocent, effort to make sense of his argument. I apologize for it.
One common argument that Keynesian-type economists, such as Paul Krugman, offer when they wish to excuse deficit financing is to compare the amount of outstanding government debt to total GDP and then say “See! Total GDP is large enough to allow the government to easily repay its debt by raising taxes in the future, so government debt isn’t a problem.” This argument effectively treats the income of the citizens as property of the government – as property that secures the government debt and, hence, that encourages creditors to continue to lend to the government at low interest rates.
In the earlier version of his essay, John wrote “unless Americans were already excessively taxed … there’s no way Treasury could borrow as it does.” The ellipses in this quotation signal my exclusion of a subordinate clause the meaning of which I couldn’t grasp, but one that seemed not to change the fundamental point.
(John has since changed the wording to this [original emphasis]: “Unless Americans were already excessively taxed now such that lenders trusted tax revenues, there would be very little U.S. debt.” I interpret this new wording to have the same intended meaning as the earlier wording.)
But I erroneously read John as saying this: “If Americans were excessively taxed … there’s no way Treasury could borrow as it does.” I assumed that his use of “unless” was a careless wording choice that would have been improved by “if.” On my reading, John’s argument becomes quite the opposite of what he meant; it becomes a version of the Keynesian argument commonly offered by the likes of Krugman.
Now I understand that John believes that the government is able to borrow the gargantuan sums that it does only because Americans are today taxed excessively. John’s argument is emphatically not the Krugman-Keynesian one, and so I apologize for my earlier misreading of his argument.
But now a new problem for John’s argument emerges: A citizenry excessively taxed today – or so it seems to me – is one that is less likely, not more likely, to be able to be taxed even more heavily in the future in order for the government to obtain the revenues it needs to service and repay its debts. Just as creditors are less likely to extend credit on easy terms to a firm that is being drained of wealth by lots of embezzlement, creditors are less likely to extend credit to a government whose citizens are already excessively taxed, for such excessive taxation both is more likely to intensify tax resistance in the future as well as to reduce the future tax base by shrinking the economy.
Yet for John, what makes government, in the eyes of creditors, an especially attractive borrower is precisely its excessive current taxation of its citizens. In John’s view, today’s abuse of taxpayers is a signal that government is willing and able to abuse tomorrow’s taxpayers even more. I write “even more” because government debt is growing, so taxation of citizens must become ever-more excessive.
I remain unclear why John nevertheless frequently criticizes Veronique de Rugy, Romina Boccia, me, and others for worrying about growing government indebtedness. Such indebtedness, again, requires even greater abuse of taxpayers in the future. Wishing to avoid this increasing abusiveness of taxation should lead John to oppose increasing government indebtedness.
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If my new reading of John is correct, it seems that he should be a leader in the ranks of those of us who warn against deficit financing. I gather, though, that he’d prefer that a greater portion of government expenditures be funded with debt and a lesser portion with current taxes. But if government reduces its current intensity of taxation, then – on John’s own theory – it dims the very signal that increases its attractiveness to creditors. It sends a signal that it’s less willing to tax its citizens in the future – causing, in John’s theory, creditors today to be less willing to lend on easy terms. John’s argument, then, must be the ultimate starve-the-beast one: A dramatic reduction in taxes today will deny government access to resources both from current taxpayers and from creditors who are reluctant to lend to a government that signals its unwillingness to tax its citizens excessively. Unfortunately, starve-the-beast is bad economics.
While I don’t buy John’s theory, I again at least concede that it’s very different from – indeed, the opposite of – the Keynesian-Krugman one that I’d earlier accused him of using. One reason why I don’t buy John’s theory is that, if only because the government can sell its bonds to the central bank, it remains the case that deficit financing encourages special-interest groups to obtain government spending that will be paid for largely by other people (here, by the general populace through inflation). I also, for the record, believe – apparently unlike John – that deficit financing keeps today’s tax bill lower than it would otherwise be while the burden of repaying that debt is, when not reduced by inflation, paid by future generations.
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A final point. John mistakes what Adam Smith, James Buchanan, and other budget-deficit hawks mean by the shifting of the fiscal burden. The argument is not that today’s government spending and actions don’t cause current harm. Of course they often do, as John’s examples amply document. Instead, the argument is that the persons given the burden of paying the bill for the government spending that gives rise to these current harmful activities are future citizens-taxpayers.
Suppose that a majority of today’s citizens-taxpayers mistakenly believes that spending huge sums of money to convert to net-zero carbon emissions is a good idea. But this majority is too stingy to have its taxes raised in order to pay for all that government must do to attempt this conversion to green energy. So the government borrows the money. These borrowed funds are then spent on this energy conversion only to discover within a few months that this forced attempt to achieve net zero is inflicting extreme damage on the economy.
John treats this damage experienced today as disproving the classical-economics-Buchanan insistence that the burden of repaying government debt falls on future generations. But John is mistaken: the government debt must still be serviced and repaid, and the obligation to do so (assuming away default) falls on future citizens-taxpayers. The irony here is that this destructive government program – destruction that is indeed experienced today – would not have occurred if government had no access to deficit financing.
In short, the classical-economics-Buchanan argument is not that deficit-financed current government actions impose no harms today. Instead, it’s that when government acquires through deficit financing the resources it uses to perform the actions that inflict those harms, future citizens-taxpayers are handed the bill for repaying the creditors who loaned those resources to the government. And so if deficit financing of government spending were prohibited, government today, and in each day in the future, would be less likely to inflict harm today because it would have less access to resources.
When the federal government spends far beyond the tax revenues it has, it gets the extra money by selling bonds. The Federal Reserve has become the biggest buyer of these bonds, since it costs them nothing to create more money.
[A]nti-globalization protesters … fall rather in the category of spoiled children. But they are ‘our’ children. If we fail to persuade the idealistic young of the merits of a liberal global economic order, it may founder before the certainty of its enemies.
