I have attempted for decades to enlighten knowledgeable and lettered people about the side show known as the Public Debt, with little success. The erroneous notion that government funds itself, or at least the better part of its expenditures through tax revenues remains an indomitable premise for too many economists, especially those on the right.
Is Public Debt the great scourge that many claim? The answer is a clear and resolute NO!
Government has no funds or resources. It must always turn to others for the means to underwrite public expenditures. Whether project costs, handouts, public debt repayment or interest, the government invariably thrusts its bills on to citizens resident within its jurisdiction for settlement. Therefore, the government’s deficit must always be the whole of its expenditures, and not just the amount spent in excess of tax revenues.
Government doesn’t care from whom or how it collects the required funds: whether funds arrive by Taxation or Borrowing, whether from locals or foreigners. It only matters that the government’s bank account is perpetually replenished.
Many who deplore the government paying interest on the Public Debt fail to realize that government contributes nothing to the cause, it having no funds or resources of its own. But it certainly matters to those supplying the funds, to the resident citizens of the jurisdiction or community. Perhaps one should examine the aggregate finances of community residents in determining the benignity or malignancy of interest before proclaiming it grossly injurious. The simple analysis may yield astounding results.
A large number of economists tenaciously argue that when government borrows to fund a project in the present it passes the debt along to future generations. True, but a government bond is reckoned as both an asset and liability: an asset or IOU for the lender, and a liability for the issuer. Yet many ignore the asset component when speaking of transfers to future generations.
It is self-evident that taxed funds, however seized, never pass along to the individual taxpayers’ heirs. Their progeny are deprived of said principal plus all the returns such carefully conserved and invested funds might have yielded. If one were to total up all US Federal Government expenditures financed by Taxation since its inception 250 years ago, add in compounded interest forgone on the incredible sum, one would have a better idea of the immense asset that has failed to transfer to future generations.
In Public Borrowing, solely from resident citizens, public debt certainly transfers to future generations, but so does the IOU created and held by resident citizens, specifically lenders. Thus, the community conveys both a liability or claim as well as an equivalent IOU or bond, a fact which so many ignore or dismiss. Summing the two would leave one with a big fat zero.
It would matter greatly if public expenditures were confirmed as worthy and wealth creating, but we have no such measure of a good government expenditure, a gross delinquency that Public Finance specialists have never rectified. We do know something of the costs, always subject to upward revision, but little if anything of the benefits. Until one develops a proper accounting of the costs and benefits of public expenditures, one may expect that much of what government does counts as wasteful.
It is common among economists in denouncing the Public Debt to negligently ignore the vast sums squandered by government. Suppose that 80% of public expenditures go to waste. I think it more, but let's settle on this figure. $5 trillion taxed means $4 trillion in resources wasted in the here and now, inflicting great financial injury on those in the present, and an injury that carries along to their heirs through the erasure of wealth and the returns such wealth would have generated.
If borrowed, the same impoverishing outcome occurs in loss of resources and desired yields on those resources, though the debt and equivalent asset plus accruing interest transfer through the generations until an eventual settlement. That settlement would consist of a transfer of funds, $5 trillion plus interest, through Taxation from resident citizens, taxpayers, to other resident citizens, noteholders, and of the squelching of an asset and equivalent liability, $5 trillion plus interest. Thus, the aggregate finances of resident citizens would be unaltered in the transaction.
To recap, if the government borrowed the funds, 80% of funds or resources go to waste, greatly impoverishing present and future generations, and a public debt and equivalent asset transfer to succeeding residents. If taxed, the same without the public debt and equivalent asset transferring. In summary, the effects are the same.
What is the real problem then? Is it the Public Debt, of which the eventual settlement leaves the aggregate finances of resident citizens unaltered? Or is it the vast waste of resources in public expenditures?
If the Government always spent well, then public expenditures would justify their cost. Citizens and firms would see their costs lowered or returns elevated by prudent public investments yielding returns exceeding all costs.
But government rarely spends well. Regardless of whether funds are taxed or borrowed, present generations pay along with future generations for the outrageous squander of funds or resources laboriously earned and subsequently plundered by the incorrigible and destructive beast of government.
