Budget Deficits, and the 'We're Burdening Our Grandchildren' Myth
In his classic autobiography, Shoe Dog, the great Nike co-founder Phil Knight recalled how in the company’s early days, he essentially spent every dollar that wasn’t “nailed down.” Knight had an expansive vision for his shoe company that extended well beyond running shoes, but sources of finance rarely shared Knight’s exuberance.
As a consequence, Knight spent the first eighteen years of Nike’s existence regularly worried that the next day would be the company’s last. With funds always and everywhere scarce for the entrepreneur, building Nike was quite the highwire act.
All of the above rates routine mention in consideration of government spending that grows and grows. Governments don’t pull that money from the sky; rather the ability of politicians to spend is a consequence of wealth previously created outside of government. Translated, without private sector wealth creation politicians would have no money to spend.
The above truth is something all of us would ideally internalize. When politicians promise to boost economic growth through stimulus spending, they’re lying. They can only spend insofar as the growth already took place. Politicians and the economists who enable politicians engage in double counting of the most obnoxious kind when they claim government spending boosts growth, and that huge spending cuts would shrink it.
Thinking about all of this in terms of Knight, he was able to eventually turn Nike into a financially flush, global sports brand. His story is all too uplifting. Still, he spent so many years thinking he wouldn’t make it thanks to an aforementioned scarcity of capital. It ought to make readers wonder: how many great entrepreneurs missed their chance to turn their vision into something great all thanks to a smaller capital base made trillions smaller by gargantuan government?
The federal government spends somewhere north of $4 trillion every year. Imagine then if the federal government were half its present size, and if $2 trillion extra each year were flowing through the private economy; funding brilliant ideas hatched by visionary entrepreneurs. Channeling 19th century political economist Fredric Bastiat, consider the unseen.
Which brings us to a popular narrative on the right about budget deficits, and the supposition that those deficits saddle the grandchildren with monstrous debt. Libertarian policy analyst Michael Tanner routinely puts out op-eds and books in which he makes the “we’re burdening our grandchildren” argument, all the while promising a “day of reckoning” from the debt. Tanner is not alone. Countless conservatives share Tanner’s worry, including National Review’s Robert VerBruggen. When it comes to deficit alarmism, libertarians and conservatives think very much alike.
And they miss the point.
Implicit in their handwringing about deficits is that taxes aren’t high enough. Yes, when the right goes nuts over debt it hands the argument to the left. Their analysis is flawed in three ways.
For one, those on the right convinced that deficits represent a brutal burden for “future generations” are saying we have a revenue problem today; thus the deficits. They’re right about one thing, that we have a revenue problem, but it’s not one of too little tax collection. It’s one of too much tax collection. Yes, revenues are too high, and they’re going higher. That’s the why behind deficits. We know this because investors continue to charge the U.S. Treasury less and less to borrow. While interest rates on 10-year Treasury debt were over 11% in 1980, nowadays it costs Treasury under 2 percent. That’s a very clear signal from the marketplace that investors are supremely confident in present and future revenue collections for the U.S. Treasury, thus explaining the ease with which Treasury borrows.
For two, fairly explicit in their analysis is that we’re having a grand old time now with all the government largess, while handing the hangover from all the borrowing to the “grandchildren.” That’s just silly. When governments spend it’s Nancy Pelosi and Mitch McConnell allocating precious resources versus Jeff Bezos and Peter Thiel. Politicians can’t create good times with the money of others. They can only create austere conditions.
Third, the view of the deficit scolds fails for it presuming that our taxes are presently low at the expense of future generations that will suffer nosebleed rates. This is the “intergenerational” thing that excites the deficit hawks. Don’t buy it. It’s mindless. Market signals tell us it is. As evidenced by falling Treasury yields, investors presently think those of us supposedly benefiting from government waste are taxed more than enough. That’s again why Treasury has long been able to borrow so cheaply.
As for future generations, and the “reckoning” they’ll allegedly have to foot the bill for, it’s evident that they won’t suffer nosebleed rates of taxation either. We know this because with government borrowing, “tomorrow” is regularly being priced. Not only can Treasury borrow at 2.3% on 30-year loans, investors are clear that Treasury could borrow in size going out 100 years. At low rates.
These low rates on Treasury borrowing 30 years out and beyond are a market signal that future generations won’t face high tax rates. We know this because high rates correlate with slower growth, and with slower growth, reduced tax collection. Reduced revenues would logically correlate with higher borrowing costs for Treasury, not lower. Treasury rates are very clearly telling us that the “grandchildren” won’t pay for our profligacy with nosebleed rates of taxation, but this basic market truth won’t deter the deficit worriers. Figure that their line about “burdening the grandchildren” is as old the grandparents of today, and will surely outlive them. Rest assured that 30 years from now, the deficit scolds of tomorrow will be making the same tired arguments made by the scolds of today.
And then in the land of reason the reasonable will rightly only focus on how many dollars the federal government spends. That’s the only number that matters. Deficits are accounting, but they’re more importantly about finance. And financiers are clear that the U.S. doesn’t have a revenue problem, nor will it.
But the U.S. does have a spending problem, and that’s what the scolds miss with their endless alarmism. The true burden for future generations isn’t debt that will plainly be serviced at low rates of taxation; rather the real burden is a less evolved economy that we hand to future generations thanks to waste today. To understand this truth, readers need only refer back to Phil Knight, and how capital was always scarce. When governments spend we suffer many more famous politicians, and many fewer Knights.
The burden of government spending is a now thing, not something passed on to future generations. We suffer government waste now simply because today’s entrepreneurs must get by with much less since politicians waste so much of what the private sector has produced. As for the sainted grandchildren, their burden will be pursuing advances and cures that we should have passed down to them, not higher tax rates.