Towards A Good Samaritan World

Wednesday, February 16, 2005

Give Irwin Stelzer credit for defending a politically incorrect position: that deficits don't matter. I differ, but there are a couple of things economists should come clean about:

1. The government never has to pay back its debts. Individuals have to pay back debts because they die. Governments live (as far as we know) in perpetuity, so they can keep rolling debt over forever. So it's not true to say that what we borrow, our children and grandchildren will have to pay back.

2. Even a deficit is sustainable if it's less than or equal to the economic growth rate. Because in that case, national debt will not grow as a percentage of GDP. Suppose that the government runs a budget deficit of 3% of GDP every year, while the economy grows by 3% of GDP every year. This year we may meet that yardstick. GDP growth will probably be around 4%; the budget deficit may be less than that.

So the deficit doesn't mean the sky is falling. That said, a balanced budget is a brilliant, wonderful thing! If capital doesn't get soaked up by the government, it goes to entrepreneurs instead, who do all kinds of creative things with it. Remember the late 1990s? Taxes are bad but deficits are worse, because a deficit is a tax, and precisely on those activities-- borrowing and investment-- that we should encourage the most.

2 Comments:

  • Bravo.

    Deficits aren't, of course, literally taxes on invenstment, but they certainly do achieve the same effect by sucking money out of the private economy.

    On the other hand, government debts don't have to be paid back at any particular time, yes, but that doesn't mean you (and your children) don't have to pay for them.

    By Blogger Nato, at 4:08 AM  

  • I second that bravo.

    By Blogger Thomas Reasoner, at 12:59 PM  

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