Bad Bill of Goods: Why the Deficit?

According to the deficit-hawk’s version of conventional wisdom, any time the government borrows it must be bad for the nation. The small government zealot goes even further and declares that anytime the govt spends at all, it detracts from private enterprise. These ideas have overtaken much of our national debate. Together, they may well be the worst economic policy bill of goods we’ve ever been sold.

Granted, there is such a thing as too much debt. The govt has options beyond those of a simple household or the average company, but those options aren’t infinite. The limits start – but definitely don’t end – with the same concerns as a personal budget: will my income grow faster than my debt? Supposing I borrow $100 for a year and pay 10% in annual interest, I’ll have to pay back $110. If I don’t use that borrowed money for something that returns more than the interest, I’m losing out. If I use part of it for professional negotiation tips that get me a salary increase, I could gain more than the interest and score big on my debt. If my salary grows slower than my debt, I’m getting poorer. If my salary grows faster than my debt, I’m getting richer.

That’s not the whole story though. The govt isn’t just a salary and a stack of bills. They also control the money supply. If they expand the money supply fast enough, it can cause inflation. As with debt, there’s such a thing as too much inflation. But inflation has a remarkable knack for making large amounts seem smaller. When you’ve got a huge savings account, inflation is not your friend. For the large credit bill, inflation is the best thing since sliced bread. For that large mortgage, it’s a godsend. The downside of high inflation are infamous. We can’t just throw open the printing presses with wild abandon, of course. But a little bit of inflation does wonders for a debt laden society. And a touch more inflation than normal can be a big help. At least over a short period, govt can add in a moderate spike in inflation to speed up the growth in income versus the growth in debt.

What matters is whether – over time – our income ends up getting bigger faster than our debt, with inflation’s impact factored in. The debt isn’t bad, as long as we can get a handle on it. And we can. All we need to do is return to a relatively normal tax structure. Our revenue is currently freakishly low.

“Federal taxes are the lowest in 60 years, which gives you a pretty good idea of why America’s long-term debt ratios are a big problem. If the taxes reverted to somewhere near their historical mean, the problem would be solved at a stroke.” – Felix Salmon, Chart of the Day: US Taxes

Return to a relatively normal tax structure. Add in a little bit of moderate inflation for a few years. And voila. The problem would be gone.

But most of our current deficit-hawks don’t care about that. Why? Because they’re mostly the same people who are small-government zealots. In their minds, all govt is bad and just takes resources away from private enterprise. They’re ignoring something crucial. Most govt activity helps business. Here’s where the small-govt folks will tune out (assuming they listened this far). But think about a few examples:

  • Roads: better roads mean lower transportation cost, increasing the amount customers can afford to order from suppliers
  • Safety: Police and fire protection and building codes reduce asset losses. They also reduce risk, lowering insurance costs.
  • R&D: many of our products today have been developed with the help of govt investments in research that have made it dramatically easier for our industry to bring new products to market

And there are many more. So many more that several volumes can easily be filled detailing all the things govt does to lower the cost of doing business, promoting private enterprise.

And yet, we have a bunch of politicians trying to cut our govt services as if that would be a good thing. They’re dedicated to avoiding a normal tax structure like we had in the 1950s and 1960s. That’s the last thing they want, because that would adequately fund govt operation and reduce the deficit. And if we adequately funded govt operation and reduced the deficit, they’d have no leverage to push dismantling all that govt activity. Never mind it helped build American business. Never mind that other nations are using their govt programs to build infrastructure and promote R&D for their private enterprise. Never mind that we’d fall behind in a hurry with more cuts. Or that we’re already risking falling behind from the cuts we’ve already made versus earlier spending on infrastructure and R&D. Never mind that our economy has recently suffered crushing blows from insufficient regulation of the financial industry. No, according to our small-govt zealots, we must ignore all of these things because they believe in their hearts that govt could only ever get in the way. They believe this despite all evidence to the contrary. And if we let them win the day, we’ll suffer for their anti-govt crusade.