Monday, May 18, 2015

Debt??? What debt???

Why Government Deficits and Debt Do Matter

Richard Ebeling

The Congressional Budget Office (CBO) reported in early May that for the month of April 2015 the Federal government ran a budget surplus, taking in more in taxes than it laid out in expenditures. Don’t be fooled by one month, especially when it was a month when people filed and pay their taxes. Government deficits and growing debt are on the horizon for as far as the human eye can predict.

Yes, for right now the trillion-dollar-a year budget deficits that marked the first years of the Obama Administration have abated. For 2015 through 2017, the CBO projects that Washington’s budget deficits will be “only” in the range of $468 billion and $489 billion per year.

But after that, given current “entitlement” legislation for such programs as Social Security, Medicare and ObamaCare, the annual budget deficits will start rising again after 2017, and will be over a trillion dollars once more in 2025.

The CBO calculates that by 2025 these more “modest” annual budget deficits will cumulatively add over $7.5 trillion to the existing $18.3 trillion of Federal government debt, for a total a decade from now of almost $26 trillion. This will be more than a 40 percent increase in the Federal government’s debt over the coming ten year period.

The per capita government debt burden for every American in 2015 is estimated to be about $58,000. In ten years, in 2025, based on demographic estimates of U.S. population growth, that per capita debt burden will have increased to nearly $78,000, for an almost 35 percent increase, while the U.S. population will have only increased by around 8 percent over the decade.

The Government’s Burden Equals What is Taxed and What is Borrowed

Does it matter that the government funds part of its expenses through deficit financing instead of simply raising taxes to cover all of its expenditures? Noble prize-winning free market economist, Milton Friedman (1912-2006), was adamant that what mattered was what government spent, not how it raised the money to pay for it:

“Keep you eye on one thing and one thing only, how much government is spending, because that’s the true tax . . . If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to how down government spending as a fraction of your income, and if you do that, you can stop worrying about the debt.”

If the government taxes the citizenry, the dollars collected and the real resources those dollars have buying power over in the marketplace are transferred from private sector hands to the hands of Uncle Sam, who then decides for what they will be used.

But this is no less the case when the government borrows dollars in financial markets to cover part of its expenses in excess of collected taxes. Instead of a private borrower borrowing those dollars and using the real resources those dollars can buy in the marketplace for investment, capital formation or other purposes, the government borrows them and uses the real resources that can be bought with them for its own political-oriented goals and ends.

Either way, the total amount of the income and resources of the society transferred out of private hands and into the hands of the government is represented by the total spending by that government, even if part has been taxed and part has been borrowed.

Friedman once asked the question: Which is preferable, a situation under which the government taxes and spends $800 billion with a balanced budget; or a situation in which it taxes $400 billion and borrows $100 billion for a total of spending of $500 billion, with a budget deficit?

In terms of the total extraction of wealth and income from the members of society by government, clearly its siphoning off $500 billion is preferable to it taking and using $800 billion of the resources and products produced through the peaceful and productive efforts of the citizen-taxpayers, Friedman reasoned...

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