Government Creates More Negative Externalities Than It Eliminates

by Don Boudreaux on January 7, 2020

in Budget Issues, Debt and Deficits, Other People's Money, Property Rights, Virginia Political Economy

In my most-recent column for AIER I explain that deficit financing of government spending creates negative externalities no less than would a factory owner who disposes of his factory’s wastes in an open-access river with households and other businesses downstream. The logic of my explanation is a straightforward application of sound reasoning from Econ 101, and is inspired by my late Nobel-laureate colleague, Jim Buchanan – whose works on both public finance and on externalities are pioneering and important, yet unfortunately still today largely ignored even by economists.

Here’s a slice from my column:

With deficit financing, government spending is excessive. Just as persons located downstream on an open-access river helplessly suffer the burden of excessive amounts of pollutants emitted by factories located upstream, citizens-taxpayers in the future helplessly suffer the burden of excessive debt borrowed by government in the present. The very same economic logic that tells us that a factory’s open-access to an unowned river results in excessive pollution tells us also that government’s open-access to future-taxpayers’ purses results in excessive government spending.

And therefore, just as the problem of river pollution won’t be solved merely by changing the identity of the owners of upstream factories, the problem of excessive government spending won’t be solved merely by changing the identity of the representatives of citizens-taxpayers. In the same manner that a solution to the problem of excessive emissions of pollutants requires meaningful and enforceable restraints on the actions of those who would pollute other people’s properties, a solution to the problem of excessive government spending requires meaningful and enforceable restraints on the actions of those who would spend other people’s money.

…..

Actually, future citizens-taxpayers of a deficit-financing government fare worse than do households and businesses located downstream on an open-access river from a waste-dumping factory. The reason is that it’s easier for those along a river bank to move away – or not to move there to begin with. It’s much more difficult for future generations who are citizens of a country to move from that country, and impossible for them to choose not to ‘move’ there to begin with.

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