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Fiscal Shenanigans Are Destructive and Not Productive

Here’s a letter to a Café Hayek reader who disagrees with my stance as a budget-deficit hawk:

Mr. Gill:

Thanks for your e-mail.

You “believe if the government can keep borrowing to pay its debts off the best policy is to slash taxes and use borrowed money to pay for most government expenses.”

First, no government can continue indefinitely to service its debt obligations merely by issuing new debt. But let me here put this objection to the side.

Even if it were true that government could borrow indefinitely to fund its programs, any such indiscriminate use of deficit financing as you propose is reckless and would inevitably inflict great damage on the economy. The reason is that the real cost of government programs is the value of the goods and services that are not produced in the private economy as a result of resources being used by government. And so if government is not to be a net drain on the economy, the value to society of government programs must exceed the value of what the carrying out of those programs causes not to be produced in the private economy.

To achieve this condition for government spending is difficult in the best of circumstances. Deficit financing, however, makes this achievement almost impossible because it enables today’s voters to spend other people’s money. With voters able to arrange to receive goods and services through the government paid for with borrowed funds that these voters will never have to repay, the quantity of such goods and services demanded by voters will be too high (for the same reason that if I can arrange for some unseen person hidden behind a curtain to buy my dinner, I’m more likely to order a more-expensive dish rather than a less-expensive one). Deficit financing encourages the diversion of too many resources from the private sector to the public sector. And this harmful encouragement would only intensify if the government can indefinitely avoid servicing its debt obligations with revenues drawn from higher taxes or reduced spending.

Fiscal shenanigans, no matter how clever, never create real resources out of thin air. Therefore, when such shenanigans desensitize voters to the true costs of government programs, government will use too many real resources. The inevitable result is that citizens of the country are made poorer than otherwise.

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