You are upset about the deficit, and you are not alone. Talks of deficit reduction are all the rage these days. However, whether or not government spending is paid for with taxes today or borrowing today and taxes tomorrow, the effects are essentially the same.
Think about this: if the government raised an extra trillion dollars in tax revenue tomorrow, would America be better off? The knee-jerk reaction is to shout “Yes!” However, take another moment to consider your answer. This trillion dollars would merely be shifted from citizens to the government. If you were to walk out on to the street right now and hand the first person you saw a dollar, would this make you two richer? No, it would simply shuffle money from one person to another. In the same way, taxes to reduce the deficit only move resources; they do not create wealth.
I assume this claim makes sense to you, but you are now probably wondering, “What about the benefit of reducing the debt burden?” Yes, this is a consequence of increasing tax revenue now; however, there is nothing inherently beneficial about lower government debt. Americans have two options to finance government spending. First, we can accept higher taxes today in order to pay off the debt. This would mean lower taxes in the future. The only difference is when we pay the taxes, not how much. Second, we can continue to borrow money to finance government spending and pay back the debt at some point in the future. This would mean lower taxes today, but higher taxes in the future. Again, the difference is timing. As well, by postponing the payment, people can collect interest on their own money to offset national debt interest payments. The only benefit in reducing the debt today is that we do not have to reduce the debt tomorrow. Nothing in that statement implies one choice should take preference over the other.
While Americans can legitimately differ in their opinion on the correct choice between higher taxes now or later, it is worth mentioning that the United States government can borrow money at a lower interest rate than most other types of loans. At a time when millions of Americans need extra help paying back personal debt that collects interest at a higher rate, it would make sense to postpone paying back the government debt until the future. Still suffering from the Great Recession, Americans need tax relief now, not later.
Regardless, my arguments still miss the most powerful point made by those fearful of high deficits and debt. This group of concerned citizens assumes that if the United States government continues to run large budget deficits and accumulate debt, we will be unable to pay back the debt. Consequently, the nation will suffer a Greece-like debt crisis. While possible, it is entirely improbable. Low interest rates on government borrowing reflect confidence that the United States can and will pay back the debt. As well, there remains large amounts of untapped tax dollars for the United States to raise money in order to pay back this debt.
While politicians and pundits waste their words talking about the deficit, the truly worrisome number remains ignored: nearly $4 trillion in total federal government spending per year. It is this amount that must eventually be paid for by Americans, not the deficit. The deficit represents the tax burden being postponed to the future, but the rest of the spending represents what the American people pay to the government. To talk of the deficit entirely misses the point.
In order to illustrate this point, imagine a man walked up to you in a dark alley and forced you to hand him $2,000 in cash. Not able to pay his full demands, you give him $1,500 in cash and promise to pay the remaining $500 next month. Knowing where you live and fully confident he can “convince” you to pay up, he accepts. Assuming you are conditioned to think in terms of deficits, you will be upset at only the $500 you still owe the burglar. Is not the entire $2,000 your true loss? Bemoaning the $500 loss more than the $2,000 loss would baffle an outside observer. Yet, this is how the political debate over government spending has been framed.
Granted, the government does differ from a burglar in that it provides some goods and services worth the cost of the spending, but certainly not all $3.7 trillion worth. Liberals, how do you like your money going toward multiple wars? Conservatives, you guys like smaller government, right? The total amount of government spending deserves the complete attention of Americans. The deficit deserves an occasional glance, at most.
Whether government spending is financed via taxes or borrowing is a non-issue. Focusing on deficits is equivalent to arguing over whether to pay for a bill with the money in your left pocket or your right pocket. The total cost of the bill is what matters!
Source of spending data: http://www.usgovernmentspending.com/