Central planning is bad, which means government spending is bad. Contra the most prominent number in economics (GDP), government spending is by its very name an economic wrecking ball.
These truths rate repeated mention, particularly given the rising tendency of natural government skeptics to cheer more tax collections for the U.S. Treasury. In a recent piece published at the libertarian Cato Institute, its excellent immigration specialist David Bier wrote what’s true about the highly positive economic impact of foreign workers, but puzzlingly added that immigrants are additive when it comes to “reducing government deficits.” Really? Where’s the evidence?
Since 1980, federal tax revenues have soared alongside federal debt that has increased quite a bit more. Which is logical. The more that any borrowing entity takes in, the more that the same entity can borrow. Translated, surging revenues since 1980, along with market expectations that future tax revenues will eclipse those of the present, is enabling growing amounts of borrowing by a class (politicians) that exists to spend.
In his defense, it’s not just Cato’s Bier making an odd case that the way to bring down federal debt is to produce more tax revenue for the very politicians driving up the debt. In another recent piece, Cato policy analyst Dominik Lett wrote that “In the short run, federal deficit spending increases aggregate demand and alters inflation expectations, thereby raising prices for goods and services. At the same time, high levels of federal debt reduce incomes and productivity by crowding out private capital and placing upward pressure on interest rates.” These things aren’t true, and Lett surely knows why.
As libertarians have long correctly asserted, governments have no resources. That they don’t is a reminder that they can in no way increase “aggregate demand” since demand is always and everywhere an effect of production. Governments can only spend insofar as producers have less. Say’s Law is rigid.
As for inflation, Lett implies that it’s caused by higher prices. Cato co-founder Ed Crane would disagree there. To say that higher prices cause inflation is like saying wet sidewalks cause rain. Causation is being reversed. Inflation is a shrinkage of the monetary unit, in our case the dollar.
This is notable considering Lett’s contention that government spending causes higher prices, followed by it putting “upward pressure on interest rates.” If the latter were true, then logically there would be very little federal debt. That’s because the purchase of debt is a purchase of goods and services in the future, and that’s paid for by the dollar income streams that Treasuries pay out. Treasuries are the most owned income streams in the world, and they’re not that way because the world lines up to be annually fleeced by Treasury.
More realistically, government debt associates with falling rates of interest precisely because debt is trust about the creditworthiness of the borrower. And we’ve seen just that since 1980: soaring debt alongside falling rates of interest. If it were as Lett contends, there would once again be very little debt. Markets are wise.
Which is the point, and it’s one that Cato’s scholars would seemingly embrace. More tax revenue for Treasury and by extension Congress is not a good thing since it enables not just more central planning of resources by the federal government, but also more borrowing.
Evidence supporting the above claim is abundant, quite unlike the contention that more tax collection reduces government deficits. It does no such thing.
Originally published to Real Clear Markets.
