Here’s an e-mail to my friend John Tamny:
While there’s much to admire in your essay “Socialism, Not Debt, Causes Economic Collapse,” you dismiss too quickly the possibility of government debt being monetized and, hence, fueling inflation – as well as dismiss too quickly the findings of Carmen Reinhart and Ken Rogoff. In addition, you miss at least two other foundational objections to deficit financing. One is ethical while the other is economic.
The ethical: The bills for government programs paid for today with borrowed funds are handed to future generations. Our children and grandchildren are forced by government borrowing to pay tomorrow for whatever programs we undertake today. While borrowing for some projects might overcome the presumption that such spending of other people’s money is unethical, this presumption looms large. Yet it is ignored – I believe unethically – by those who are blasé about government borrowing.
The economic: Spending other people’s money is inefficient. The ability to launch and expand government programs with borrowed funds that will be repaid, not by the borrowers, but by other people naturally prompts today’s citizens and their political representatives to launch and expand some programs that they would otherwise choose to forego. Just as I will purchase a new Mercedes rather than a used Toyota if I get to spend, not my money, but your money without your permission – indeed, without even your knowledge – today’s citizens and politicians will purchase, at the expense of future generations, government goods and services for themselves that they would not purchase if they had to spend their own money.
In short, ability to borrow fuels excessive government growth, which reduces private-sector growth.
The fact that the U.S. and U.K. economies have grown despite their governments’ heavy borrowing does not mean that this borrowing has had no negative economic consequences. The only way that you could deny this conclusion is if you were to insist that real resources are not scarce – if you were to insist that real resources channeled by debt into today’s government programs materialize, not from the private sector, but out of thin air.
Knowing that you understand that real resources are indeed unavoidably scarce, I continue to be mystified that you remain so blasé about government borrowing.