Are deficits really good for our economy?

Posted on March 24, 2013 by


They are; at least according to Charles DuBois in his letter to the editor in the Wall Street Journal. Mr. DuBois says,

In brief, the near-term impact of deficit spending is for the private sector to incur one debit (to buy the bonds) and two credits—one for receiving the bonds and one for receiving the deficit payment.

Of course, there must be a debit for every credit, so the “missing” debit is the increase in the federal debt. However, over the near-term at least, deficits appear to aid, not hinder, private-sector spending.

Unlike many Keynesians, at least Mr. DuBois recognizes there is a future cost to current spending.  In a post later this coming week I will comment on the morality of imposing costs on the future taxpayer for a current benefit, so we’ll leave that aspect aside for now.  There are really two issues to highlight today.  First, if the government had not spent the resources, they would have been available for the private sector to spend.  Since public spending with deficits takes resources that would otherwise have financed private sector investment, public sector consumption today comes at a cost of private sector investment today–investment that would carry a future yield.  Therefore continued deficit spending on government consumption lowers the future standard of living.  Of course, many pro-government supporters would object to my characterization of government spending as consumption; indeed, their language is always of government spending as investment.  Yet one cannot think of an expenditure as an investment outside its ability to yield additional resources in the future; the track record of government spending does not encourage me (think the green investments that have been squandered).  So our continued profligate spending is likely to lead to less ability to pay back in the future.

Second, private savers are not funding this.  As we’ve noted repeatedly, the Federal Reserve is monetizing much of our public spending, and sending an incredible distorting information signal on the true cost of our deficits.  Deficit spending actually costs far more than realized due to the implicit taxation of the American saver through the ongoing financial repression.

So far from aiding private sector spending, there is an implicit tax on private sector spending today, and a massive implicit tax on future taxpayers due to our massive debt.  One doesn’t have to buy a Ricardian equivilence model (where current taxpayers exactly offset deficit spending by reducing consumption to save up for the future taxes) to recognize that people may become more concerned over the direction of our economy and country in the presence of large deficits and debt.  As they become concerned, they are less willing to invest in the future.  Regime uncertainty seems a reasonable explanation for much of our current problems, and deficit spending is likely a part of that regime uncertainty.