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The Burden of Deficit Financing is Real

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Here’s a letter to Café Hayek commenter James Leonard Hudson:

Mr. Hudson:

Thanks for your comment [2] in which you express disagreement with my AIER column titled “A Swollen River of Indebtedness [3].” Specifically, there I argue – inspired by the work [4] of my late Nobel-laureate colleague James Buchanan (some of it done with my current colleague Dick Wagner [5]) – that deficit financing of today’s government spending is paid for by future taxpayers, for it is they to whom the bills for today’s deficit-financed spending are sent. Because deficit financing allows government to spend other-people’s money – other people many of whom aren’t yet born, and so who are taxed without representation – government spends excessively.

Against this argument you object that I “ignore the fact that we present people do not actually have to repay the debt piled up by our fellow citizens of the past: instead we can kick the can down the road, borrowing enough and even more than enough to pay for maturing debt and for the interest on continuing debt.”

With respect, your objection misses the mark.

First, no one denies that government debt can be rolled over. Nothing in Buchanan’s analysis of the burden of public debt identifies the precise timing of when future taxpayers bite the bullet and actually repay any part of, or the whole of, accumulated debt. And of course kicking the debt can down the road is precisely what all generations of citizens-taxpayers have incentives to do. But ironically, the greater the ability of each generation of citizens-taxpayers to kick the debt can down the road, the stronger and more-relevant is Buchanan’s analysis, for…

Second, the core economic problem created by deficit financing is resource waste. (The core ethical problem is living at the expense of others.) The ability of people today to stick future generations with the obligation to service government debt is, it bears repeating, the ability of people today to live at the expense of other people. This ability causes resources to be wasted today but with the cost of such resource-waste borne by people tomorrow. Thus, even those citizens-taxpayers who tomorrow will roll-over the debt suffer a burden from today’s deficit financing because tomorrow’s economy will be less productive than it would be absent the resource waste caused by today’s deficit financing.

It’s important not to let a focus on the monetary side of the ledger blind us to the real-resources side. Whether citizens-taxpayers in 2030, 2050, 2120, or 17776 roll-over, repay, or repudiate government debt incurred in 2020, the fact remains that the ability today to consume through government at the expense of future generations causes people today to consume too many resources through government, thus reducing the rate of economic growth.

And the fact that market forces have so far proven to be powerful enough to ensure that future generations are nevertheless more prosperous than past generations means neither that this happy trend can withstand any amount of resource waste caused by deficit financing, nor that we today are ethically entitled to waste resources at the expense of our wealthier children and grandchildren.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030