Here’s a letter to a reader who sent to me John Tamny’s latest essay on deficit financing of government spending.
Mr. L__:
Thanks for passing along John Tamny’s latest piece on government debt.
I’ve already shared, many times, my reasons for disagreeing with John’s obliviousness to the dangers of deficit financing of government spending. Nothing that he writes here changes my mind – just as, I’m sure, nothing that I might repeat would change his.
Like Paul Krugman and other Keynesians, John commits a kind of aggregation fallacy when he writes that “unless Americans were already excessively taxed … there’s no way Treasury could borrow as it does.” John here mistakenly assumes that the U.S. government is the American people – or, rather, that the American people’s incomes and assets are property of the U.S. government, much as a corporation’s income and assets are property of that corporation. Just as Acme Corp.’s anticipated income and asset values serve as security for Acme’s debt, the American people’s incomes and asset values, in John’s view, serve as security for U.S. government debt.
The tiny kernel of truth in John’s theory is that the U.S. government does indeed operate under this assumption, and its creditors take that operation to heart when they buy its bonds. But operating on this assumption leads to ill-consequences to which John is blind.
Shareholders of a private corporation that borrows excessively and spends foolishly are nevertheless ethically responsible for that corporation’s debt – both because they voluntarily purchased those shares and because they can easily sell those shares if they wish. Americans’ relationship to the U.S. government is categorically different. Americans do not voluntarily purchase shares in that government and, crucially, unlike corporate shareholders who can sell shares, Americans have no practical way to escape the debt burdens imposed on them by imprudent government borrowing.
John’s Pollyanna-ish opinion of deficit financing rests on the continued willingness of creditors to lend on easy terms to the U.S. government despite that government’s enormous indebtedness. John takes this willingness as evidence that continued government borrowing poses no problem for the American people. But in fact the continued willingness of creditors to lend to the U.S. government is due chiefly to the fact that, unlike a private corporation, the U.S. government can unilaterally seize ever-larger chunks of Americans’ incomes, either through direct taxation or inflation.
And this ample ability of government officials to unilaterally seize other people’s incomes in order to pay for what those officials fancy means that – also unlike a private corporation – government officials practically spend too much because deficit financing enables them to spend other people’s money without the people from whom that money is seized having any real say in the matter.
It’s dismayingly ironic that the individualist John Tamny treats the property of the American people as property of the U.S. government.
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
