A Response to Donald Boudreaux on 'Ignore the Cooing of Deficit Doves'
>The very excellent Donald Boudreaux of AIER wrote an article recently, Ignore the Cooing of the Deficit Doves, in which he deplored the dangers of the deficit. He classifies the anti-taxers or those undisturbed by deficits into two categories. First are those who see no danger and great benefits from deficit expenditures, commonly known as Keynesians. Separate are those who see taxes as a greater peril than the accumulation of public debt. I find myself in the latter group, plus I embrace the extreme element of it which seeks the replacement of taxation with borrowing so that every government expenditure must pass muster in the marketplace. .
Mr. Boudreaux argues two points: One, that the deficit threatens and harms the financial well-being of a community or jurisdiction; basically burdening future taxpayers with public debts and obligations incurred for doubtless dubious public expenditures in the present. Two, he envisions an incontinent monster of government, stripped of all spending constraints, created by the abolition of taxation.
There are a number of disputes with this analysis.
Firstly, on the issue of deficits it is widely thought that the government funds itself, that tax revenues supply the government with its contribution to public expenditures. But government earns nothing. It is not a Wal-Mart store inviting in and persuading customers of the values inherent in stocked goods with all transactions completed voluntarily. Assorted and bewildering taxes, more correctly fines or penalties applied to the combined incomes, property and assets of taxpayers supply the government with the means to contract and disburse for the provision of public goods and services. These confiscations comprise its contribution to public expenditures. The taxpayer must pay if public goods are plentiful or scarce, exceptional or inferior, cheap or dear, vital or worthless, needed or not. To construe the delinquency as the slight gap between the revenues of taxation and total expenditures, i.e. the borrowed portion, challenges reason.As government possesses no hoard of money, no assets, no resources with which to meet its daily needs, government cannot fund public expenditures. It never has and it never will. Its contribution to public expenditures is nil, and has been since its inception. Thus, the deficit is, in fact, every dime spent by government.
Looked at through the above prism, before the coronavirus panic federal expenditues were somewhere north of $4.5 trillion. The addition of state and municipal government expenditures elevated the deficit to approximately $7.5 trillion. And if one were to sum the public expenditures extending back to the inception of all governments, one begins to grasp the true depth of public debt and deficits, unaccounted as they presently are.
Taxpayers comprise the source of outlays for all public expenditures; in the U.S. approximately $7.5 trillion before the Coronavirus set in. $1 trillion missed the mark.
The primary problem posed by government is not found in the comparatively small amount of money spent in excess of tax revenues. The big problem is what the community receives for the money or rather immense resources commandeered by government in total. If a community receives only $2.5 trillion of worthy services for its $7.5 trillion outlay, then wealth in the amount of $5 trillion in one year has been obliterated.
It seems a strange affair to speak of the dangers of $1 trillion in deficits in consideration of how much is actually spent in politicized fashion.
Second, is it better that a government tax or borrow to fund public expenditures? Many economists answer this question with a firm 'No' by simply focusing on accruing public debts. When one relentlessly attends to the financial costs of an enterprise without ever heeding its benefits, one would be inclined to wonder that it ever commenced operations even though it may be the most profitable corporation in the universe. It is not known as Cost Analysis, but rather Cost and Benefit Analysis, and for a very good reason! Does it really matter whether government taxes or borrows to fund public expenditures?
The answer to this problem was given partially 200 years ago by David Ricardo. He demonstrated that there exists a superficial equivalence between taxation and borrowing in garnering funds for public expenditures. Many falsely claim that his proof was refuted by assailing the implications of his proof and conclusion; by arguing that a system of perpetual borrowing is unworkable and impractical, that deficits would soar to incomprehensible levels and never find favour with the public or public lenders. But one does not defeat a proof because one lacks the means to understand its full implications. Thus, Ricardo’s conclusion stands as solidly today as it did 200 years ago.
I said above there exists a superficial Ricardian Equivalence if one accepts that taxation and borrowing pose the same effects in raising funds for public expenditures. But even Ricardo questioned such an equivalency, arguing that the effects of taxation and of borrowing in acquiring funds would be very different, and he was right. Taxation bears immense costs that disappear with borrowing.
Most would agree that Taxation’s deterrent effect, various fines and penalties deterring one from doing as he might were such impositions absent, would disappear with the replacement of taxation by borrowing, wherein lenders are encouraged to surrender funds temporarily for a reward of interest.
So I'll only deal with the argument that government squander, corruption, overregulation would remain; That a government armed with the despotic and intrusive right to confiscate funds would in no way alter or moderate its behavior when disarmed of this scourge and compelled to contend in financial markets for every dime required by enticing lenders with worthy returns.
In a system of taxation, the public has never been treated to an account of the costs and benefits of public goods. As government has always availed itself of the right to take or tax even in conjunction with borrowing, it has never had to create, develop, or refine tools required to discern good government expenditures from bad. In the past, one witnessed only a crude and dishonest accounting of the costs of public initiatives subject to numerous revisions wherein costs invariably inflate. Benefits were never considered. The good old days have yielded to the common practice of rarely mentioning costs amid clamorous insistence a public expenditure is always worthy.
If a city, state or nation were to abolish all taxation in favor of governments letting markets control their spending, an interest rate or capital charge would be applied to all public expenditures, and the public would possess the novelty of a solid financial measure of government’s performance. A representative system repeatedly prone to the corruption, deceit, indifference, and arrogance of those entrusted with public office would be forced by a petulant, prying, reproachful public to re-evaluate everything it does, to operate under sound financial imperatives, to act as prudently as people and corporations do with simple cost and benefit analysis. The nation’s leaders would have to literally face the nation each time the government attempted to raise capital.
Lenders to private concerns are keen on recovering funds loaned and collecting pledged returns for the pain of temporarily ceding use of money. Risks are reflected in rates demanded. If doubts arise regarding the borrower’s ability to repay after funds transfer, the risks are reflected in the market rates for the bond issued or loan’s value. When an arrogant, wasteful, corrupt entity fraught with special interests, favour, and self-dealing is stripped of the right to take from captive customers, forced to wade into crowded financial markets and daily vie for funds amid a throng of desirous rivals offering alluring terms, the tyranny of lenders becomes palpable. Abhorrent practices must cease and unruly behavior undergo revolutionary change. If immune to change, lenders shall dwindle and the reduced remnant, acting as it might with any firm or person eagerly consuming funds and resources without returns and with large losses, should demand more generous or even rapacious terms to mitigate the threats to the security of loaned funds. Escalating interest rates on newly issued bonds would depress the value of former bond issues, further irritating lenders. The incorrigible borrower, heedless to peril, would soon find himself out of lenders and out of business.
If the entity described were one’s always needy government, and the buyers of its bonds all members of the populace: public servants, labourers, professionals, the tyranny of government must yield to the tyranny of the financier. Such lenders shall not be pleased to see their retirement savings threatened by gross disregard for returns in devising and supplying public goods. Individual lenders and the managers of public and private pension funds, acutely aware of their fiduciary duties, would not tolerate misuse and squander of monies so entrusted.
Violate the public trust or offend the majority, the public shall demand investigations and heads. Even innocent whispers of corruption, mal-administration, favouritism, nepotism, and deliberate squander may be enough to prod the public to withhold funds leaving the governing body penniless, impotent and devoid of all practical authority. How preferable a state of affairs this would be to that which the majority must endure presently! When economists state that under a system of full public borrowing future generations shall be impoverished, I would like to know how!