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Even Worthwhile Projects are Costly

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Here’s a letter to my friend Steve Conover (and I thank John Tamny for the term “deficit hawkery”):


Thanks, as always, for your e-mail and valuable perspective.

I don’t doubt that deficit financing of government projects is sometimes justified. Nor do I doubt that examples of the wise use of such financing can be found in history. Nothing in my argument – nothing, that is, in my deficit-hawkery – implies otherwise. The same is true, I’m sure, for warnings of the dangers of deficit financing offered by economists such as Jim Buchanan, Dick Wagner, and Veronique de Rugy.

But three points require emphasis:

First, even productive projects funded with debt are costly; someone must pay for them. And when government funds such projects with debt, these projects are paid for by future citizens-taxpayers. Future citizens-taxpayers might unanimously and avidly agree that they’re better off with a particular debt-funded project and its accompanying repayment obligation than they would have been without the project and no repayment obligation. But this positive assessment of the project by future citizens-taxpayers does not mean that these future people don’t pay for the project. The burden of paying for debt-funded projects always falls on future citizens-taxpayers even when those projects are marvelously productive and worthwhile as judged by the citizens-taxpayers who pay for them by servicing the debt.

Second, because neither government officials nor citizens-taxpayers are personally on the hook to repay any debt incurred today, they – unlike private individuals, households, and firms – have greater incentives to abuse the debt-financing option. Jones’s and Jackson’s ability to spend Smith’s and Williams’s money tempts Jones and Jackson to spend excessively. The significance of this fact isn’t diminished by real-world examples of Jones and Jackson having occasionally spent Smith’s and Williams’s money wisely.

Third, because of the second point above, prudence counsels that we impose restraints on governments’ use of debt financing that are more restrictive than are the restraints used to govern the use of debt financing by private parties.