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No, the Burden of Deficit Financing Is Not Confined to the Present

Here’s a letter to John Tamny:


Much of what you write in your essay “Misunderstood Deficits” is correct. But your continued insistence that the burden of government indebtedness is incurred in the current period rather than passed on to future taxpayers is incorrect. It’s simply bad economics to assert, as you do, that “Government spending is always, always, always a tax that is paid right away.”

While all resources loaned to government are indeed used by government right away, this fact emphatically does not mean that these resource uses are paid for right away.

The reason should be obvious. Creditors lend money to government today in exchange for increased purchasing power tomorrow. If these borrowed funds are used to build, say, a highway, the creditors – quite correctly – don’t think of themselves as paying for the highway. The creditors turn over resources to government to get access to more resources in the future, not to pay for access to a highway. Nor would anyone else, if asked to identify who pays for the highway, point to the creditors.

Further, precisely because the highway is funded with debt, this highway isn’t paid for by today’s taxpayers. Yet someone must pay for the highway. That someone is tomorrow’s citizens-taxpayers – the citizens-taxpayers tomorrow who, to enable the government to service the debt, must either receive less than otherwise in government programs or pay more than otherwise in taxes.

If we rule out default, the above truth is inescapable. It holds regardless of whether tomorrow’s taxpayers are richer or poorer than are today’s taxpayers; regardless of whether the borrowed funds are used productively or unproductively; regardless of whether tomorrow’s taxpayers are pleased or angry at having to service the debt; regardless of whether the government’s fiscal position remains sound or becomes shaky; regardless of whether monetary policy is conducted prudently or recklessly – indeed, regardless of the truth or falsity of any claims you make in your essay.

On this matter I recommend strongly that you study the late Nobel-laureate economist’s Jim Buchanan’s 1958 book, Public Principles of Public Debt. Short of that, I’m sufficiently vain to suggest that this chapter – “On the Burden of Government Debt” – from my and Randy Holcombe’s new book, The Essential James Buchanan, supplies a clear and reasonably complete explanation of why the burden of deficit financing is indeed shifted to future taxpayers and how, as a result of such financing, the government spending that I join you fully in decrying is made larger and even more wasteful than it would be otherwise.



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