Was the Budget Deficit Worth the Fight?
The fight over the debt ceiling was fought between two sides that essentially agreed about one central premise: The government’s budget deficit is too high.
The fighting was about how the deficit should come down. The Republicans want to bring down the deficit by reducing spending. The Democrats want to accomplish the same thing by reducing spending a little bit less and increasing taxes.
Notice that there were lots of viewpoints apparently lacked the political forces to even join the battle. Except in the columns of Paul Krugman, we didn’t hear from the hardcore Keynesians who think that the government should spend more regardless of the size of the budget deficit. And we didn’t hear much from anyone advocating that the government needs to tax less and spend less regardless of the budget deficit.
That last position really was excluded in the public debate. It didn’t even get much of a voice in places you might expect it to, such as the editorial pages of The Wall Street Journal. This silencing of the classical liberal (which is to say, libertarian) position is really stunning.
Let’s back up a bit and get our terms straight. When politicians and pundits use the term "budget deficit," they refer to the concept in very peculiar way. If your household budget has a “gap” or a “deficit,” this means that you have expenses that you cannot pay. It doesn’t mean that you are borrowing to spend.
For instance, if you buy a house with 20 percent down, we don’t ordinarily think that this means you have a huge budget deficit. Your household budget is only in trouble if the mortgage payments are greater than you can afford.
But talk about the government’s budget deficit usually does not refer to failure of the government to actually pay its bills. It’s not a gap between what we’ve promised to pay and what we can pay. Instead, we’re considered to be running a budget deficit whenever the government is borrowing to finance some of its spending.
This has very serious political implications. If borrowing and budget deficits are the same, and deficits are bad, then taxation seems less bad. Rhetorically, spending through money raised by taxes is “living within our means,” while spending money raised through borrowing is “living beyond our means.”
Why should this be? It’s not at all clear that we should regard money generated through taxes as the “means” or “revenue” of government.
When government spending is financed through taxation, it is being financed through “means” confiscated from people who earned it.
Arguably, only fees paid for using government resources—such as tolls on bridges—are anything like the “means” of government.
To put it differently, almost all government spending represents spending beyond the government’s means. The government has almost no means at all—and that indicates that government spending is almost all deficit spending, spending beyond what the government has earned.
Spending tax revenues is arguably more like deficit spending than spending financed by borrowing. At least spending financed by the issuance of bonds indicates that the government is selling a product—a relatively safe savings account—at a price the market is willing to pay—the interest rate on bonds. Taxation is just a way of filling the gap created between the money voluntarily transferred to the government—through paying tolls and buying bonds—and the amount the government wishes to spend.
The mainstream way of thinking about budget deficits was implicitly rejected by the Austrian economist Ludwig Von Mises. For Mises, a “budget deficit” was spending in excess of revenues from taxes or borrowing. In other words, the problem with budget deficits is that they are inflationary—the government is literally creating new money that grows the money supply, because it is not balancing its spending with either taxes or borrowing, both of which take funds out of public circulation.
Here’s what Mises said in a lecture in the 1960s:
"The government and the journalists who were writing for the government told us about this 'deficit spending.' It was wonderful! It was considered something that would improve conditions in the whole country. But if you translate this into more common language, the language of the uneducated, then you would say 'printed money.' The government says this is only due to your lack of education; if you had an education you wouldn't say 'printed money,' you would call it 'deficit financing' or 'deficit spending.'
"Now what does this mean? Deficits! This means that the government spends more than it collects in taxes and in borrowing from the people; it means government spending for all those purposes for which the government wants to spend. This means inflation, pushing more money into the market; it doesn't matter for what purpose. And that means reducing the purchasing power of each monetary unit. Instead of collecting the money that the government wanted to spend, the government fabricated the money. Printing money is the easiest thing.
Every government is clever enough to do it."
That’s a very useful way of thinking about budget deficits, because it goes right to the heart of the problem—they’re an assault on the quality of our money and on savings. The inflation they create also tends to scramble the capital structure of the economy in unpredictable and highly damaging ways. Think housing bubble, the growth of megabanks, de-industrialization, and unemployable Americans.
The mainstream approach to budget deficits is not very useful, because it encourages two errors:
(1) complacency about the damage done to the economy by government spending that takes money out of the hands of private entrepreneurs and puts it toward politically directed projects and;
(2) the idea that we can ameliorate the supposed damage caused by too much government spending by raising taxes, something Von Mises’s student Murray Rothbard once described as “curing influenza by shooting the patient.”
The budget ceiling fight was fought over a false idea of what’s ailing the economy—too much government borrowing, when the problem is too much government spending. This means that we’ve probably moved away from the real cure—freeing up private resources from government taxes or borrowing—and toward an economic policy that will drive us toward recession. Was it really worth it?
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