What’s the Problem With Government Budget Deficits?
April 26, 2010 · Posted in Government
Government Spending & Taxation
Since theft is an act of aggression it violates the victim’s value preference. After the goods have been obtained the people in the government will put them to one or the other use. They will hire people, purchase arms, establish offices, give some money to people so long as they prove that they are not working, hire tax collectors, throw people in jail who sell or carry a certain vegetation, maintain those jails, send people in green costumes to countries overseas to aggress against and shoot people, etc. All these activities will ultimately serve those people in whose pockets the stolen money ends up, some more, some less, some sooner, some later. In general these will always be external businesses who bribed government officials, bureaucrats, and to a lesser degree welfare recipients.
Every time someone is hired and every time resources are purchased by government officials they will not be available to people who would have obtained them on a voluntary basis for other uses. It is at the very moment that the stolen money first exchanges hands after being stolen that it begins to exert the harmful effects that result from bureaucracy.
These are all just examples which are well known and nothing surprising or new. The fundamental fact about government activities is that they by necessity and by definition go against the value preferences of those who are not in the government, viz. the majority of the people. This is how they ultimately reduce the welfare of society, and thus ultimately the happiness of the majority.
When that same group intends to employ more resources than it is able to fund from the money obtained in its regular annual extortion runs, it borrows additional money from certain people in a credit transaction, resulting in public debt. This additionally borrowed money is what is commonly referred to as a budget deficit.
When projects are funded via a budget deficit, the additional money is actually obtained in a voluntary transaction at first. An investor who is offered a better deal by the government than he might have found elsewhere, hands over money with no aggression involved. But he is promised repayment of his money plus interest through future theft from taxpayers. Instead of purchasing and putting to use factors of production in the service of consumers, as some other entrepreneur would have had the incentive to do with that same money, the government will fund the same kinds of consumptive or even destructive activities as described above with the borrowed money.
The fundamental difference in the case of the budget deficit is that at the moment of putting the funds to use, the money has, for now, been obtained from someone who voluntarily entered into this transaction, with the intention of sharing the future loot from the theft promised.
Thus taxpayers won’t immediately be forced to restrict their consumption because somebody else is doing it for them at the beginning. However, as the public debt interest has to be paid in the future, and the principal sum needs to be repaid, taxes will inevitably rise. Taxpayers will be more and more forced to restrict their future consumption in order for the government to pay off the investors who restricted their consumption in the present.
The burden of restricted consumption is thus shifted over time from the investor over to the taxpayer. However, the investor made the choice voluntarily, along with all the risk of default which comes with the contract. (In fact, a complete debt default is precisely what the investor would suffer for funding a comparable project on the market, ensuring corresponding and healthy incentives moving forward.) The investor’s time preference and value preference is at no point being acted against. Nothing is violently taken away from him or anybody else. He willingly participates in the transaction.
The taxpayer, however, never had any choice. He doesn’t necessarily realize that what the government consumes now will be funded by his restricted consumption in the future. Money that would usually have been used to fund the purchases and thus spur production of capital goods (whose employment would increase the production of consumer goods in the future), is now employed in fundamentally consumptive government activities which necessitates that the debts be paid off through the restriction of future consumption lest a default occur.
But the crucial point with the budget deficit is that, from the consumers’ (= the majority’s) point of view, the effects of deficit financing don’t show up until a later point in time. In the meantime it all appears to be taking its normal course as things would on the market. But when the debts need to be paid off, the expectation that the borrowed funds were used to obtain capital goods which would enable repayment through the production of more consumer goods with less labor input than before, turns out to be a completely false one. No new capital was generated from the projects in question and upkeep of existing capital was, as a tendency, being neglected. Capital consumption inevitably ensues.
Thus, with a budget deficit, and more broadly with the public debt, the fundamental damage occurs at the point where money is taken away from the taxpayer to pay off the investors who voluntarily funded unproductive and ultimately coerced projects in the past.
From the point of view of the majority of the people, the real problem in the phenomenon of the budget deficit lies in the fact that it adds to the public debt and that they or their progeny will at some point have to foot the bill for past expenditures and thus resource employments, again undertaken against their choosing, time preference, or value preference.
It is also important to consider that at any given point in time the current generation is already paying off debts for unproductive undertakings pursued by governments in the past, making the damage caused by deficits and public debt a lot more tangible and immediate, and conveniently ruling out significant tax cuts by the government.
This is very important: When people say something like “the deficit is damaging/bad/a problem/etc.” what it ultimately means is that the money used for more spending and favors and owed by the government to investors will be taken from you or your children in the future via the threat of kidnapping and imprisonment if you don’t comply. This is really at the root of all the problems around public debt owed, and the deficit that we hear about every year is just piled on top of that existing debt.
Due to the fact that the effects of deficits are not immediately noticeable to the general public they are an incredibly convenient way of funding government programs and shifting involuntary burdens on to future disenfranchised generations. Thus public debts will always continue to grow along with rising taxes, until a level is reached where the required tax burden becomes untenable, where creditors can no longer be paid off, the government can no longer fund itself, where social tensions rise between recipients and payers, and where the whole superstructure that is the government collapses in its entirety.
“Solutions” to Deficits
As I explained, the ultimate damage caused by public budget deficits occurs at that point in time when taxpayers are forced to restrict their consumption and unjustly bear the cost of malinvestments from the past.
Ironically, when you look at the political stage, all you will hear in regards to “solutions” to deficits in the end, will for the most part be tax hikes. These are not solutions. They are the ultimate manifestation of the very problem at hand. They are, in fact, the precise opposite of a solution. Keep this in mind whenever you hear politicians talk about deficit solutions. Raising taxes to reduce deficits is absolutely and 100% an admission that one has completely failed to solve this deficit problem, and in fact laid the final brick that was missing in the very process of the public’s depredation via deficit spending.
A real solution would of course be to make investors suffer the consequences of their unproductive investments, default on the public debt, stop stealing money from people, and allow for voluntaryism to take the place of interventionism.