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The Burden of Deficit Financing is Real II

Here’s a letter to the great Deirdre McCloskey who e-mailed to me the following (link added):

Dearest Don,,

Your elegant piece on the AIER site about The River of Public Debt is great.  I do wish that Jim Buchanan had had your lucidity and grace. But I think I know what, say, Larry Summers would reply.  “If the project that the government spends the bonded money on is beneficial to future generations–say, defeating the Axis in World War II–than hurrah for deficit financing!  Future generations would be like Smith and Williams, that is, if the governmental factory is giving goods instead of bads to them.  And so here I have a ton of governmental ‘investments’ we ought to make, now.”  Yes, I know: a blank check.  But then that is the problem.



Dear Deirdre:

You’ve made my day with your too-kind words about my AIER column on government debt. Thanks!

You’re correct about how someone such as Larry Summers would reply to my (and to Jim Buchanan’s, and to Dick Wagner’s, and to Veronique de Rugy’s) warnings about the dangers of deficit financing. That someone would observe, and correctly so, that if projects financed today with debt are wise and prudent – so wise and prudent as to raise the economy’s productive potential above what it would be absent these projects – then even those future citizens-taxpayers who must repay the debt are blessed by this deficit financing rather than burdened.

Buchanan, of course, never denied such a possibility. Nor do I. But he insisted on the recognition of two realities. First, the costs of even the most wonderful government programs that unambiguously improve the lives of future generations are paid for, not by the generation that borrows to pay for the programs, but by future generations. That these programs might be well worth their costs means neither that they are free nor that the responsibility for paying these costs is not shifted by the generation that borrows onto the generations that repay the debt.

Second, because deficit financing allows today’s citizens-taxpayers to spend the money of other people – some of whom aren’t even yet born – there is little reason to suppose that these monies will, in reality, generally be spent wisely. Such spending, as your closing words suggest, is far more likely to be wasteful: a transfer of benefits from future generations to the current one.

The ‘Larry Summers’ response proves too much. Suppose that Summers encounters someone who argues for legalizing theft on the grounds that thieves can be imagined to spend stolen booty in ways that, compared to how their victims would spend the money, are more likely to promote the well-being of their victims. Summers would have to concede that such an outcome is possible.

But he would surely not regard this possibility to form a credible case for legalizing theft. Summers understands that people who spend other people’s money generally spend that money wastefully, not only from the perspective of the other people whose money is spent, but from that of society at large. Once we recognize that deficit financing allows people today to spend other people’s money, we have no good reason to believe that this spending generally will be in anyone’s interest other than that of those who do the spending.