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Sarasota Thu Feb 11, 2010 5 years ago

MY VIEW: Why deficits are so pernicious

by: Robert Higgs

Editor’s Note: The following are excerpts from a 1991 article authored by Robert Higgs, the Thomas F. Gleed Professor in the Albers School of Business and the director of the Center for the Study of Social Dynamics at Seattle University.

The deficits of the past three decades can be viewed as pernicious for many reasons. Consider just three of the more important ones.

The economic case against deficits.
When the government borrows money, it diverts private savings to uses that have a smaller component of investment and a larger component of consumption.

By bidding up interest rates, government borrowing “crowds out” borrowers who would have made investments in the private economy, while the funds the government borrows are used overwhelmingly for consumption. The result is that the nation’s capital stock, the aggregate of all durable resources that enhance the economy’s productive capacity, grows less rapidly.

As a consequence, future standards of living will be lower than they otherwise would have been. Our children and grandchildren will reap smaller harvests because our own generation is feasting on some of the seed corn.

The moral case against deficits.
When the service charges on the debt come due in the future, the obligation to make these payments, by suffering some form of taxation, will fall on persons who will have had absolutely no choice about entering into the debt contract and will have received no benefit from it.

Unless the government defaults, which would be morally reprehensible and economically harmful in itself, individuals in the future will be stuck with higher taxes, either directly or via inflation, than they otherwise would have had to bear.

The fact that in the future some individuals will receive the interest and principal on bonds they inherited in no way diminishes the force of the argument. The good fortune of the legatees does not cancel the injustice done to others. And justice has to do with individuals, not classes or generations. The soothing apology for the debt, that “we owe it to ourselves,” is a fallacy. The persons who will owe it are not identical to the persons to whom it will be owed.

To impose financial obligations on our children and grandchildren gratuitously for the sake of our own present enjoyment is moral arrogance at best. It bespeaks a contempt for others well captured by the famous remark attributed to Madame de Pompadour, mistress of Louis XV: apres nous le dêluge (“after us, the flood”), or in today’s terms, the future be damned.

Symptoms of a political system gone corrupt to the core.
Notwithstanding all the political rhetoric to the contrary, the government runs chronic deficits because the members of Congress want to run them. They make this choice because they value their re-election more than they value the interests of the public. Even a cursory examination of the evidence shows unmistakably that the emergence of chronic deficits since 1960 has resulted from federal spending growth, not from decreased government revenues.

Politicians are afraid to rein in the runaway spending so that it will match revenues because they don’t want to offend those who receive the benefits financed by the government — goodies paid for sooner or later by taxpayers.

Much of the government’s spending is channeled to well-organized political pressure groups whose support is viewed as essential by incumbents seeking re-election.

The deficits reflect a political system responsive to special interests at the expense of the general interest of the public now, as well as the general interest of future generations …

Unfortunately, given our political system as presently constituted, individual citizens acting on their own can do virtually nothing to remedy these ills. Because people rarely organize for political action except on behalf of some narrow interest, no one is likely to create an effective movement in opposition to continuing massive deficits.

So far as the government’s fiscal irresponsibility is concerned, the immediate future probably will be no different from the immediate past.

Dollars in billions         2009           2010         2011          2012
Revenues                      $2,105         $2,165      $2,567       $2,926
Spending                        3,518           3,721        3,834        3,755
Deficits                            1,413          1,556        1,267         828
Debt held by public         7,545         9,298        10,498      11,472

As a percentage of GDP
Revenues                         14.8%        14.8%         16.8%       18.1%
Spending                           24.7%         25.4%         25.1%      23.2%
Deficits                               9.9%         10.6%         8.3%         5.1%

Source: Pete G. Peterson Foundation

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