Seemingly lost on the myriad deficit hawks in our midst is that the extraction of wealth from the economy is the true governmental sin, and also the crisis. Whether the extraction is born of taxation or borrowing realistically makes no difference.
When governments extract resources, they don’t subsequently stare lovingly at the money. If only they did! Instead, they spend it. And in spending it, they arrogate to themselves the allocation of trillions worth of precious resources. There’s your crisis, though it’s unseen.
Think of the myriad technological advances that never see the light of day, think of the healthcare advances of the cancer and heart disease variety that never happen, think of the much higher wages that never materialize since government at all levels is such a size consumer of resources. There’s your illness, while that which shrinks the resources allocated by government (including a closing of the lending window) is the cure.
Yet the deficit hawk crowd continues to focus on the looming “crisis” whereby the lending window will allegedly be shut someday, as though that’s the problem! Yet “tomorrow” when it comes to investors cutting off governments, the U.S. Treasury in particular, is seemingly the day that never comes. And if Treasury yields are to be believed, the day isn’t coming anytime soon.
Despite this, despite market signals arrived at in the world’s deepest markets that tell us the debt isn’t the problem, the deficit hawks continue to talk about tomorrow as though they’re smarter than the markets. There’s not a stadium in Washington, D.C. large enough to fit all the economists, pundits, and politicians who’ve warned us about the crisis that allegedly will be, instead of the much bigger one involving the annual extraction of resources via taxation and borrowing.
Take the excellent Chris Edwards, a policy expert at the Cato Institute. Edwards believes that to “avert a debt crisis we should decentralize most government spending.” About decentralizing government spending, there’s no argument there. The more that policymaking and spending can be left to the states, the more that people can choose their wasteful bliss.
At the same time, it’s possible Edwards could be persuaded that he populates a well past capacity stadium of deficit hawks who focus on the debt as the source of future crisis. In Edwards’ words, leave spending to the states not solely because of choice or federalism, but because “the states have extensive constitutional, statutory, and economic restrictions on deficits, debt, and spending.” This sounds like a mere shift of the central planning of private wealth to the states. Furthermore, it arguably misses the point.
To see why, consider two government budgeting scenarios. Under Scenario A, a certain government has a budget of $6 trillion, albeit in balance. No borrowing whatsoever. And thanks to rising economic growth that is easily taxable, the aforementioned budget grows every year sans debt. Under Scenario B, a certain government has an annual budget of $1.5 trillion per year with $500 billion of it borrowed annually; the debt easily financed given revenue growth similar to that in the A scenario. Which is the better one in terms of both freedom and economic growth? This is not a trick question, or it shouldn’t be. Scenario B is the much better one, and it’s not even close. The extraction is once again the problem, not how witless politicians extract the wealth.
Which brings us to the how behind the borrowing. Consistently missed by deficit hawks on the left (there are some) is that the deficits and debt obviously don’t result from too little tax revenue. At the same time, deficit hawks on the right shouldn’t be so smug. Deficits and debt don’t result from too much spending either. In reality, what enables massive debt on the governmental level is too much tax revenue now, and much worse, the anticipation of quite a bit more tax revenue in the future. Markets are a look into the future, and low yields on 10 and 30-year U.S. Treasuries signal immense investor calm that Treasury will easily pay its debts. In short, the crisis is a too much tax revenue problem that enables even more wealth extraction via debt.
Except that none of this is being discussed. Instead, Edwards suffocates his expertise by focusing on a what-could-be crisis scenario that markets reject instead of the actual one related to extraction that is right before us.
That’s too bad for all of us in the here and now, but it’s even worse for the sainted “grandchildren.” While the deficit hawks say it’s immoral to leave the debt to the grandchildren, they ignore that much more immoral than debt is leaving the grandchildren a massive government to service, along with a much less evolved and less free society born of that massive governmental inheritance.
Republished from RealClear Markets