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Indebted to John Tamny for Sparking this Exchange

My morning began with writing this letter, to John Tamny, pushing back against his criticism of budget-deficit hawks. John then thoughtfully replied, to which I here offered a second response.

After sending the last-linked note to John, I followed-up with this note:


Another, more succinct, response to your hypothetical budget choice occurs to me. The choice that you pose in your Daily Caller essay and as you summarized it in your last e-mail is this:

Which is preferable to you: $50 trillion in federal spending over the next ten years with none of it borrowed, or $25 trillion in spending over the next 10 years, half of it borrowed? I think the answer is pretty clear. Spending is the problem, not how they get it.

But because the ability to borrow increases government’s incentive to spend, in today’s real world in which government can borrow with little or no restraint, a more realistic choice is this:

Which is preferable to you: $50 trillion in federal spending over the next ten years with half of it borrowed, or $25 trillion in spending over the next 10 years, none of it borrowed? I think the answer is pretty clear. The ability to finance with debt increases spending.

Deficit financing fuels higher spending, a fact that makes the latter choice more realistic than the choice as you pose it.


John and I continued throughout the day to correspond by e-mail. You can read the remainder of our correspondence beneath the fold.

John responded as follows:

Don –

I’ll take your scenario, but it doesn’t disprove mine about deficits not mattering or not being the problem

And then if an ethical question, I think it a mistake to ignore the ethics: federal taxation is the mob dropping the bill at the doorstep of the very few rich.

Isn’t the more ethical and market friendly answer for Congress to fund itself through voluntary lending whereby the lender is paid for access to the funds?

Thanks again for the discussion.


… to which I answered (slightly modified):


Thanks for your follow-up reply.

Our disagreement, such as it is, seems to be over whether or not deficit financing is or isn’t really disguised taxation. I believe that it is disguised taxation – disguised, that is, during the present when borrowed funds are used to finance government spending. The taxation becomes real when it must be repaid. If it’s repaid, necessarily in the future, with above-board taxation, I don’t see why the ethics of raising taxes then are somehow less troubling than are the ethics of raising taxes today.

I agree with you that taxes are ethically questionable. But we don’t avoid them by pushing them off into the future. In fact, we make them worse in at least two ways that are ethically dubious. First, because deficit financing encourages more spending, the taxes necessary to fund government activities are made higher by deficit financing. Second, with deficit financing there is even less connection than otherwise between those persons who reap the benefits of government spending and those persons who are taxed to pay for them.

If, alternatively, the debt is reduce by inflation, that is an even more devious and destructive means of servicing the debt.

Government’s creditors are not the persons who pay for the government services that are financed with borrowed funds. These creditors no more pay for those government services than does, say, my mortgage company pay for my condominium. I pay for my condominium. The fact that I do so by borrowing money from a willing lender and then repaying that lender does not mean that the burden of paying for my condo was borne by my mortgage lender in 2013 (when I bought it with borrowed funds) or is borne by that lender today in 2020.

Again, economically my bottom line is this: those of us who want to keep government as small as possible should oppose government borrowing because such borrowing makes it less costly for government to grow today. At least, that’s how I see matters.


John came back with the following:

Don –

I get your point, but mine is that the cruelty of government spending is now. Implicit in arguments made by deficit hawks is that borrowing somehow shifts the pain. No. The pain is right away because it signals growing control by Congress over the flow of goods, services and people. I’m hurt and so are you whether they tax an extra billion away from Jeff Bezos or whether they sell debt.

I also get your ethical point about shifting the burden to the unborn. Sure, but I think every bit as unethical, and realistically more unethical, is laying the burden now at the door of a tiny minority solely because that minority is successful.

Still, if deficits are the concern then it helps to look at why yields on U.S. Treasuries are so low. They’re not nearly as low on Peruvian debt, assuming such debt is traded globally. The only way to shrink borrowing is to shrink revenues in the first place. Deficit hawks invariably make their arguments about insufficient revenues. I don’t think you make this argument, but many who might ally with you do. They’re misunderstanding fixed income securities. Deficits are paradoxically enormous because Treasury ALREADY collects way too much in taxes, not because it’s not collecting enough as the hawks presume.


… to which I replied with this note:


Thanks, seriously and gratefully so.

Either I’m missing your point or you’re missing mine.

Government projects funded today with debt are financed with funds loaned today voluntarily. There is no cruelty in the present to anyone. The beneficiaries of the spending get their goodies; citizen-taxpayers do not have their taxes raised; and government’s creditors exchange control over current spending power for promises of increased spending power in the future. But taxation – which you rightly regard as cruel – isn’t thereby avoided. Deficit financing merely pushes taxation on to others – others unseen and others with absolutely no say in today’s fiscal decisions. These others, of course, are future taxpayers.

I don’t see why the cruelty that inhabits taxation today disappears or even is lessened if that taxation is postponed. Indeed, again, because deficit financing today lowers the cost to government today of spending, deficit financing results in more government spending today and, hence, more taxes overall, if fewer taxes today.

Of course debt can be refinanced, thus pushing the burden of repaying further into the future. But unless government defaults – in which case full burden of the tax falls on creditors (an even smaller minority than those who pay taxes now) – at some point the debt must be repaid.

There is a slightly different point also to be made, although it’s related to the earlier one. Because deficit financing lowers the cost to political decision-makers of spending more today, they’ll spend more. Because other people – namely, future citizens-taxpayers – must pay for this additional spending, there is every reason to believe that this spending is inefficient. Resources today do get misused because of deficit financing; it is misuse, though, the cost of which is borne by future citizens-taxpayers.

I want to keep government as small as possible and taxes as low as possible. For this very reason I oppose deficit financing. Such financing emphatically does not avoid taxation; it merely postpones it.


John responded:

Don –

No. I don’t think you believe what you wrote. Government spending, whether financed through tax or borrowing hurts everyone now.

Ask yourself, is the economy more or less free and are people more or less free when Nancy Pelosi is moving more money around? You know the answer.

That you do makes my point. Just because Jeff Bezos pays billions more in taxes than you do doesn’t mean you’re not suffering Bezos’s overtaxation. Assuming Bezos is taxed zero only to buy billions in Treasury debt, you’re still hurt. Government has more money to allocate now, which means it controls more of the economy now.

A dollar in the government’s hands is a dollar in the government’s hands. Which has been my point all along. You obviously disagree, but I think it’s a major blunder to presume that you, me and others aren’t hurt when Bezos pays more in taxes, when Ben Affleck voluntarily sends more to Treasury than he should, or when Treasury just borrows the funds. The damage is in extraction here and now, not in how the funds are extracted. No one is spared government control over the economy, which is why I focus on total dollars spent, not how much is borrowed.


And here’s my response, which is the last of today’s thread (slightly modified):


We agree that government growth is bad, for now and later. But if the topic is the funding of government spending, we have to ask who pays for this spending.

The payers are obviously not current taxpayers; the very purpose of deficit financing is to relieve current citizens-taxpayers of paying for debt-financed projects.

So from where do the funds come? From creditors, who lend the current spending power voluntarily. But they are not the ones who are properly said to pay for the debt-financed projects. They certainly don’t think of themselves as the purchasers of these projects. Creditors lend the funds in exchange for expected higher future purchasing power, not in exchange for whatever flow of services come from the debt-financed projects.

The payers for today’s debt-financed projects must be future citizen-taxpayers. It is they who must reduce their consumption (from what it would otherwise be) either by having their taxes overtly raised (or their government services reduced) or surreptitiously through inflation. The only other option is government default, in which case the tax burden falls exclusively on the holders of government bonds.

In this way, the cost of today’s debt-financed projects is pushed forward into the future.

There is, I confess, an ambiguity that arises at this point – but it’s one that works in favor of deficit-hawkishness rather than against it. The ambiguity is this: Precisely because deficit financing allows government today to spend other people’s money, government today will grow too large today and more wasteful. So who bears this cost? The answer isn’t crystal clear.

To the extent that the inefficiency or other harms of the unwarranted government spending are confined to the projects directly funded with debt, the inefficiency and harms are pushed onto future citizens-taxpayers. An example would be, say, government spending too much borrowed money on a fighter jet that Boeing today produces inefficiently because contracting with the government doesn’t press suppliers to operate at peak efficiency. The jet might ‘efficiently’ have cost only $10M but, because Boeing produced it inefficiently – using more resources than otherwise – it costs $14M. The cost of this waste of $4M worth of resources is paid for by future citizen-taxpayers.

I understand the temptation to say that this cost or burden of this $4M of resource waste is borne today, but it’s not. It’s paid for when the bill for it comes due – that is, tomorrow. The reason is that this $4M – which represents $4M worth of real resources – is among the sums, the real resources, voluntarily loaned by creditors to the government.

Nevertheless, by enabling government today to grow larger than it would otherwise grow today, deficit financing can be said to create harms and dangers from government that would not otherwise exist (or that would be smaller). The most obvious example is war. If government today goes into an unwise war using borrowed funds, it subjects the economy and its denizens to troubles and dangers that make them worse off today.

But the problem here is created, or made more likely, by deficit financing. If the government would have been more reluctant to go to war were it required to annually balance its budget, then the source of these undue problems today (in addition to heavier tax burdens tomorrow) is deficit financing.

Once again, deficit financing reduces the cost to current government officials and citizens-taxpayers to expand government’s size and reach today. This inescapable reality is a key reason for opposing deficit financing – for not dismissing deficit hawks as having unjustified fears.

I honestly cannot see why any opponent of larger and inefficient government would be indifferent to, and much less in support of, deficit financing. There’s a reason why Keynesians continue to insist that deficit financing ranges from being, at worst, benign to a positive boon. Keynesians are both naive about the motivations of government officials and Keynesians lust for larger government. Those of us who oppose larger government have every good reason – economic and ethical – for opposing deficit financing.


Only after I wrote and sent this last e-mail did I realize that one important determinant of when deficit financing today leads government to act in ways that inflict harm on citizens-taxpayers today is when that financing prompts government to act in ways that today’s citizens-taxpayers would not choose. This latter point requires deeper thought and further elaboration.