Federal Deficit Scolds and Happy Talkers Mistake the Cause of What's Irrelevant
Imagine for a moment Jeff Bezos walking into a big bank for a billion dollar loan. Then going back, year-after-year, to banks and investment banks seeking bigger and bigger loans. The borrowing would be very easy for Bezos, and would take place at very low interest rates. Mark Zuckerberg could do the same, as could Bill Gates. All three could borrow in seemingly unlimited amounts in consideration of their ample collateral: ownership of shares in three of the world’s most valuable companies.
Just the same, if Bernie Madoff were released from prison tomorrow he couldn’t borrow in even the smallest amounts at any interest rate. His reputation would follow him into any bank such that each request for cash would be met with rejection. Markets are rather wise. No matter the headline interest rates we see in the windows of banks, or the short rates for cash that the Fed vainly claims to set, every individual, every business and every country pays a different interest rate for monies borrowed.
All of this rates attention in consideration of the news last week about the federal budget deficit. That it rose 17 percent compared to 2017 unearthed all-too-typical hysteria from both sides of the ideological spectrum. Endlessly confused Georgetown professor Stan Collender let his abundant emotions get the best of him yet again on the way to a predictable USA Today op-ed about the Republican tax cuts having caused the deficit increase, and he was unsurprisingly joined by Jim Tankersley at the New York Times as the overwrought puddles shook their fists in dismay. To Tankerlsey, tax cuts must be “paid for” as though freedom from Washington’s waste is something that should only come with Congress's permission.
On the other side, the deficit happy talkers on the right offered the usual replies to their reliably hysterical counterparts on the left: their op-eds, editorials and blog posts reminded readers that federal revenues had hit an all-time high in response to the Trump tax cuts, so the blame for the deficits goes to the big spenders in Congress. Both sides typically miss the point, and misunderstand what causes deficits that don’t matter in the first place.
To understand why deficits don’t matter, readers need only consider a very basic question: would they prefer a $4 trillion federal budget that is in balance, or a $1.5 trillion federal budget of which $1 trillion is borrowed? The answer to the previous question is supremely obvious. Any reasonable person would take the deficit scenario simply because it would coincide with a federal government that is $2.5 trillion smaller.
Readers should never forget that whether the federal government borrows or taxes away the money it spends, the dollar amount of “federal spending” is just a measure of how much control the feds have over the economy. The private sector produces all the resources, so federal spending is the amount that information-deprived politicians mis-allocate by virtue of market signals (failure the most important signal) not informing what they do.
We all know regardless of ideology that the U.S. economy would be in hopeless shape if Congress allocated all of the wealth we produce, and it’s important that the previous truth inform our view of Congress’s $4 trillion in annual spending. As a rule it will do a poor job, and this will be true no matter the party in power. The goal should be for as little federal spending as possible, and without regard to how much of the funds spent are taxed or borrowed. The problem is the spending. Always. Deficits are accounting. End of story.
Except that the story doesn’t stop there in consideration of the witless arguments offered up by the deficit scolds and the deficit happy talkers who oppose them. Neither side will admit it, but they misunderstand the deficit issue in the same way. Both sides see “deficits” as being caused by not enough federal revenue. Such a view is naïve. To understand why it’s a confused point-of-view, consider yet again Bezos, Zuckerberg, Gates and Madoff. The first three have the capacity to borrow in copious amounts at very low interest rates, while Madoff’s credit is such that no one would lend to him.
Bezos et al could borrow in size precisely because lenders trust their future “incomings” almost completely. Just the same, the United States can borrow in gargantuan amounts precisely because investors trust Treasury’s “incomings” almost completely. Treasury has the ultimate collateral: a population that produces abundant taxable wealth. The paradoxical truth is that federal deficits are high simply because federal revenues are high now, and expected to grow by leaps and bounds in the future.
As is the U.S. economy is the largest in the world, but imagine how fast it will grow if automation and robots achieve their projected promise. If so, the productivity of American workers will skyrocket, so will the value of the businesses they work for, and Treasury’s “incomings” will grow and grow.
That Congress is full of wasteful individuals is a given. But that’s hardly unique to Congress. Politicians the world over would similarly love to waste wealth they had no role in producing, but they can’t borrow nearly as much (or at all) given the relative lack of productivity of the people within their country.
Readers should never forget that buyers of Treasury debt are buying the productivity of those who pay taxes that flow to the U.S. Treasury. So long as the American people produce in abundance, so will the wasteful feds borrow in abundance. The deficits aren’t an effect of too little federal revenue; rather they spring from too much federal revenue now, and the projection of way too much federal revenue in the future.
So while deficits don’t matter, there’s an easy way to fix what doesn’t matter: shrink tax rates to near nothing so that the federal government collects next to nothing. The problem is that the scolds and happy talkers aren’t in favor of doing the right thing. As their all-too-predictable rhetoric reminds us, both sides are joined at the hip in their desire for Treasury to collect ever more of our wealth. Get it?
