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An Unseen Cost of Debt-Financing of Government Expenditures

Here’s a letter to the Wall Street Journal:


Robert de Porres-Ras dismisses – I think too casually – Jeb Hensarling’s warning of the dangers of growing U.S. government indebtedness (Letters, March 7). But both Messrs. Hensarling and de Porres-Ras overlook the worst feature of debt-financed government spending – namely, it is excessive because it enables today’s politicians and taxpayers to spend other people’s money.

Government projects funded with debt are not paid for by those persons – today’s voters and politicians – who choose to implement these projects. Indeed, these projects are not paid for today by anyone. Instead, debt-financed projects are paid for by future citizens-taxpayers whose taxes must rise (or whose government benefits must fall) to service debt obligations as these come due. Able to use debt financing to stick future generations with the bill for today’s projects, government consumes and wastes more resources than it would were it required to balance its budget.

And so even if bond markets never push the indebted government into default, and even if large indebtedness never prompts the central bank to further inflate the money supply, debt financing slows economic growth by transferring more resources than otherwise into wasteful government projects and, hence, away from productive private-sector uses.

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