Here’s a letter to a new correspondent.
Mr. P__:
Thanks for your e-mail.
You wonder why I keep favorably posting items from Veronique de Rugy, George Will, and others who warn of the dangers of the U.S. government’s exploding indebtedness. “If,” you ask, “Milton Friedman was right that the actual cost of government is what it spends, not what it takes in taxes, what difference does it make if some, all or no government spending is paid for with borrowed sums?
There are two reasons why it makes a difference.
First, government debt must be repaid. If government honors its obligations, then the burden of paying for today’s debt-funded spending falls on future citizens whose taxes must be raised in order to pay off the debt. If government reneges on its obligations by formally defaulting on its obligations, then the burden of paying for today’s debt-funded spending falls on the hapless, defrauded holders of the defaulted bonds. If government reneges on its obligations by repaying the debt with newly created money, then the burden of paying for today’s debt-financed spending falls on future citizens who suffer the ill consequences of inflation.
Each of these three options – which together exhaust the range of possibilities – is unethical and corrodes the economy.
Second, because deficit financing enables today’s citizens-taxpayers to get goods and services from government without having to pay for these goods and services, deficit financing causes government to spend excessively. Precisely because Friedman is correct to observe that the true cost of today’s government is found in what it spends today rather than in what it takes today in taxes, deficit financing causes the cost of government to be higher than it would be were all expenditures funded with current taxes.
If you wish to restrain the growth of government and reduce the risk of inflation, you’d be wise to turn deaf ears to those economically ill-informed pundits who naively assert that deficit financing isn’t a problem.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
