TAMNY: Federal Deficits Don’t Matter, But Federal Spending Certainly Does

John Tamny Contributor
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Editor’s note: We endeavor to bring you the top voices on current events representing a range of perspectives. Below is a column arguing that budget deficits and the national debt are ultimately not a huge problem — government spending is. You can find a counterpoint here, where Spence Purnell, a policy analyst at the Reason Foundation, argues that the national debt and growing budget deficits pose a significant risk to America’s future financial stability.

Let’s construct two hypothetical federal spending scenarios for the next ten years. In the first, Congress spends $50 trillion without borrowing a cent. In the second, Congress spends a total of $25 trillion, with half of the funds spent borrowed. Which scenario is better for us economically?

The obvious answer is that we would be much better off with $12.5 trillion in new debt. Whether Congress taxes the money away or borrows it is really of no consequence. What matters is total dollars spent. Money isn’t some abstraction; instead it’s a claim on market goods, services and most crucial of all, labor. The more dollars Congress spends, the more control Nancy Pelosi, Kevin McCarthy, Mitch McConnell and Chuck Schumer have over the economy.

Government spending saps our economic productivity and freedom, period. To distinguish between funds taxed away or borrowed is to realistically make a distinction without a difference. More on this in a bit.

For now, why there’s even a question about which scenario is best speaks to how very much self-proclaimed “deficit hawks” have restrained reasonable economic discussion in modern times. Of the view that their support for balanced budgets renders them prudent proponents of “limited government,” the reality is much, much different. A balanced budget in the most economically dynamic country in the world signals rapidly growing government as far as the eye can see.

Figure that governments only have money to spend insofar as they arrogate to themselves a piece of the production that only takes place in the private sector. We have a large federal government, and we do because politicians have voted themselves excessive amounts of private production and will continue to do so in the future.

The deficit obsessed are merely pretending that there’s a difference between wealth taxed away versus wealth borrowed. There is, but they don’t know why there is. With deficits, government is paying savers for the right to use private wealth, whereas with taxes government is taking private wealth in order to waste it, without compensation. Which would readers prefer?

The paradoxical truth about deficits is that they’re high because federal revenues are way too high. The previous assertion will no doubt cause the heads of deficit hawks to explode, but these faux proponents of limited government plainly don’t understand how bonds and bond markets work. When the U.S. Treasury sells Treasury debt, buyers of it are buying future dollar income streams to be paid by the U.S. Treasury. The more dollars the Treasury takes in via taxes now and in the future, the more easily the Treasury is able to borrow in the first place. Market signals support this blinding glimpse of the obvious.

Considering Treasury borrowing over the last 40 years, total federal debt in 1980 was roughly $900 billion. Notable is that in 1980, interest paid by Treasury on its 10-Year Notes was 11%. Fast forward to the present, and with a total debt of $25 trillion and unfunded liabilities of quite a bit more, it presently costs the Treasury 30 basis points less than 1 percent to float 10-Year Notes.

U.S. debt is viewed as a certain “flight to safety” precisely because federal tax collections are enormous now, and will be quite a bit higher in the future. Why else would investors line up to lend so easily to the federal government unless the expectation was that revenues into the body would continue to soar?

These easy-to-understand market realities mock all the sappy laments about deficits offered up by self-righteous debt scolds. They make laughable claims about the U.S. being the “Titanic rushing toward the iceberg” in terms of debt, yet the world’s deepest markets (Treasury markets) signal that investors are quite a bit less than worried about federal borrowing.

Others claim the debt is a “national security” issue. Yes, it is. The more the world owns our debt, the less likely we are to go to war around the world. Lenders rarely lend to borrowers they intend to kill.

Most ridiculous are those who claim the deficits signal that “we’re living beyond our means” and “leaving the grandchildren with the bill.” Implicit in such trite hand wringing is that government spending makes us better off and happier. No, that’s not serious. The spending is a tax on freedom and progress for it empowering Congress to allocate resources over truly talented individuals like Jeff Bezos, Peter Thiel and FedEx founder Fred Smith.

As for the grandchildren, the burden isn’t debt that investors line up to service; rather the burden we leave future generations is a much less evolved society and economy thanks to politicians consuming so much of the wealth always and everywhere created in the private sector. The burden for future generations is that they’re left crafting advances that would have already been created for them had Congress not been wasting so much of the wealth we’ve produced.

Government spending is the problem. Always. A deficit focus is a big waste of time that pretends we have a revenue problem. Yes we do. Revenues are too high. End of story.

John Tamny is Vice President at FreedomWorks, editor of RealClearMarkets, and author of several books. His latest is They’re Both Wrong.