3 Lies They Tell Us About Budget Deficits

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Thanks to an explosion of Keynesian deficit spending around the world, an explosion that has predictably correlated with weak economic output, major ink is being spilled about the economic crack-up unfolding before our eyes. To state the obvious, wasteful, capital destroying governments can only spend what they first extract from the private sector.

In the above sense government spending is always and everywhere an economic retardant. That's the case because governments by definition are not disciplined by profit, thus explaining spending that merely consumes capital. Conversely, a private sector that is burdened by profit demands must as much as possible deploy capital with an eye on creating more of it.

Put simply, capital placed in the hands of politicians disappears, while capital placed in the hands of private actors frequently leads to innovations that allow the proverbial impoverished shoemaker to purchase equipment that expands his shoe output. Whether governments are in deficit or surplus mode, their spending nearly always weighs on economic output.

All of which brings us to the first lie we're regularly told about budget deficits. Supposedly the latter are bad, but looked at through a basic economic prism, would we prefer a balanced budget in the U.S. that coincides with $3 trillion in annual spending, or an annual budget deficit of $500 billion occurring in concert with spending of $1 trillion? Economic logic says we'd much prefer deficit spending that coincides with much lower spending in total. Once again, governments destroy capital, while private actors seek to expand it. Governments that spend less necessarily leave more capital in the hands of the productive, so for commentators to bemoan deficits while ignoring the bigger problem of spending is for them to engage in an act of willful blindness.

Another lie we're told by the well-meaning in our midst is that "we can't afford it." We can't afford troops around the world and the various military adventures that heavily deployed troops lead to, we can't afford more entitlement spending, and we can't afford government subsidization of home ownership.

While the above is partially true, the reason it's not is rarely articulated. We can't afford a global troop presence because it's a waste of human and financial capital that could otherwise be deployed in more productive areas. War is tautologically a wealth destroyer, and worst of all it's a human capital destroyer, so that's why we can't afford it. Entitlement spending works against the very saving that authors our economic advancement, plus it's a work disincentive that similarly retards our advancement. Home ownership subsidies cruelly lock individuals into a location at a time when financial capital moves at the speed of a mouse click. We can't afford housing subsidies because they make us immobile at a time when the capital that funds the creation of companies and jobs is highly mobile.

As for the lie, governments that spend - and in particular deficit spend - must enter the capital markets to attract the capital necessary to fund their waste. In that case, when commentators say we can't afford the very deficits that investors are willing to fund, they're ignoring market signals that say we can afford to do much that we shouldn't. This isn't meant to defend deficit spending as much as it's to say that there are two sides to every transaction. Wrongheaded as most U.S. deficit spending is, it's allowed to take place because investors once again think we can afford it.

Commentators who should know better frequently feel they can outthink the markets, and when it comes to deficits financed in arguably the deepest market (U.S. Treasuries) in the world, they nearly always attempt to do just that. This should be remembered the next time readers see a pundit blathering on cable television about coming budget Armageddon. Right or wrong, pundits have been saying this for as long as this writer has been sentient. I'm still waiting for Armageddon, and in fact would welcome it. See below.

All of which brings us to the most popular lie about budget deficits at the moment, which says that the deficit troubles of governments mostly in Europe threaten the global economy. What a laugh, and to understand why it is, we must ask ourselves why it's a problem when governments can no longer attract investors to fund their ongoing capital destruction.

If so, we'll then see that far from an economic problem, something quite beautiful is occurring before our eyes. Investors are presently telling various European nations "you can't afford it," and if left alone, this market-driven reality will ensure smaller governments forced to get by on less. Looked at in terms of the proverbial shoemaker bereft of funds to purchase equipment necessary for more output, governments being put on smaller allowances signals a greater amount of capital to be accessed by those eager to be productive.

No doubt there exist private sector actors that will suffer and perhaps go bankrupt thanks to government default, but that too, if allowed, would be a market positive for ensuring that the banks and other financing vehicles that supported government waste through investment in same will perhaps cast a more skeptical eye on government debt in the future. Entrepreneurs can't innovate without capital, governments destroy it, so far from something we should fear, government defaults are to be embraced as a way of limiting future government evisceration of our capital stock.

Government spending on its own is always and everywhere the economic ball-and-chain; whether the spending occurs in deficit or surplus mode merely something that detracts from the real problem. In that case it's well past the time to ignore the various budget deficit lies, with an eye on fixing the true tragedy which is government spending itself.

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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