We Owe It to Ourselves

Don Boudreaux of Cafe Hayek is having a good time with Paul Krugman’s assertion that “U.S. debt is, to a large extent, money we owe to ourselves.” This bold claim comes in the midst of yet another of Krugman’s seemingly infinite number of columns touting deficit spending as a panacea for what ails the American economy.

Boudreaux’s posts (to date) are here, here, here, here, here, and here. I will not try to match Boudreaux’s deep and weighty commentary on Krugman’s outrageous assertion. Instead, I offer the following non-academic observations for Mr. Krugman’s consideration:

1. Who are “we”? If government borrows money and spends it on goodies for Congressman X, Y, and Z’s districts, how do I get my cut? Or does the happiness generated in Congressman X, Y, and Z’s districts simply radiate in waves across the country, eventually reaching me and making me feel better?

2. I know of no magical power that enables government to ensure that deficit spending absorbs unemployed resources without diverting already-employed resources from productive uses. So this leads me to ask why it wouldn’t be better to take the borrowed money and flush it down a toilet, rather than sending it to Congressman X, Y, and Z’s districts.

3. Anyway, if the borrowed money makes (some) people in Congressman X, Y, and Z’s districts better off, why is it that “we” (i.e. the rest of us and/or our descendants) end up repaying the debt that made those others better off? I don’t understand how I “owe it to myself” when (a) I didn’t ask to borrow the money and (b) I gained nothing as a result of the borrowing.

You might claim that my personal wishes are of no account because Congress and the president are duly elected by majorities of voters. But that is tantamount to saying that Congress and the president possess a kind of omniscient super-consciousness that somehow overrides the harm, hate, and discontent that flow from their acts. I don’t think you’d agree with that, given your views about the many and various “sins” committed by the Bush administration, usually with the connivance of Congress. Or, perhaps only Democrats possess omniscient super-consciousness. Yes, that must be it.

With regard to my not having gained as a result of borrowing, perhaps you think that I ought to be happy simply because (some) people in Congressman X, Y, and Z’s districts are happier as a result of deficit spending. Perhaps I should be, but I am just a curmudgeon who has 12 grandchildren who will be less well off because of the extra taxes that I, their parents, and/or they will pay for the privilege of making some strangers happier. Are you telling me that you — or anyone — has a way of making everyone happier by making a lot of people  less happy? Or are you telling me that you don’t care who is made less happy as long as government does what you think it should do? My money is on the latter proposition.

If I do, indeed, owe some portion of the U.S. debt to myself, I hereby forgive my share of the debt and absolve myself of any obligation to pay it.

Questioning the National Debt

There is a laughable proposition — advanced by Treasury secretary Timothy Geithner, among others — that Congress may not limit the national* debt. This proposition is based on a skewed reading of Section 4 of Amendment XIV to the Constitution. That amendment was approved by Congress in 1866 and ratified in 1868.

Here is Section 4, in full:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

The first sentence — the “authority” for Geithner’s proposition — simply means that the government of the United States cannot repudiate indebtedness it has already incurred. The obvious purpose of the first sentence was to prevent future Congresses — which might be controlled by Democrats — from reneging on obligations incurred by the winning (mainly Republican**) side in the Civil War.

Putting a legal limit on the issuance of debt is not the same thing as repudiating debt already incurred. A limit on the amount of debt that the government may issue is the equivalent of stop sign; it means that the government must take steps to prevent the net accumulation of additional debt. It is up to Congress to determine the precise steps — some combination of tax increases and spending reductions — or to “repudiate” the debt ceiling by raising or eliminating it.

A responsible Congress would take steps to ensure against the growth of the debt by reducing commitments to the growth of  “entitlement” programs: Social Security, Medicare, and Medicaid. Those reductions are necessary — for the sake of America’s future — whether or not there is a debt ceiling. One could even argue that the existence of a debt ceiling — one that is always somewhat higher than the current level of debt — has encouraged Congress to make irresponsible spending commitments.

* The so-called national debt is, in fact, the indebtedness of the government of the United States. It arises from the actions of that government, not from the private actions of individuals. It is “national” only in the sense that the taxpayers of the nation are ultimately responsible for repayment of the debt and interest thereon.

** The Civil War was partisan as well as sectional. The 36th Congress, which was in session before the outbreak of the war, was divided as follows: 116 Republicans to 83 Democrats in the House; 26 Republicans to 38 Democrats in the Senate. Because of the war, and losses of seats by seceding States, the Republican Party held a firm grip on Congress in 1866: 136 Republicans to 38 Democrats in the House; 39 Republicans to 11 Democrats in the Senate.

Related reading:
Debt-Limit Silliness, at NRO (follow the links)
We Cannot Pretend the Debt Ceiling Is Unconstitutional, at The NYT (straight talk from a leftist, of all things)

Related posts:
The “Forthcoming Financial Collapse”
We’re from the Government and We’re Here to Help You
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth
The Deficit Commission’s Deficit of Understanding
The Bowles-Simpson Report
The Bowles-Simpson Band-Aid
America’s Financial Crisis Is Now

Are We Mortgaging Our Children’s Future?

Or, what will the “stimulus package” stimulate?

Congressional Democrats used to depict George W. Bush’s tax-rate reductions as fiscally irresponsible. The real problem, for Democrats, wasn’t that tax cuts might cause the national debt to swell. The real problem, for Democrats, was the prospect of having less money to spend on things that Democrats like to spend money on.

Now that Democrats control the White House and both houses of Congress, fiscal irresponsibility is all the rage (among Democrats). It seems that an increase in the national debt isn’t fiscally irresponsible if (a) it results from Democrat policies and (b) it’s caused not by lower taxes but by huge government spending programs.

Predictably, some Republicans have reverted to the old GOP line that deficit spending mortgages our children’s future (or some such thing).  The flaws in this assertion are exposed very nicely here, by professional economists.

However, the suggestion that the national debt represents inter-generational theft does hint at an essential truth. The burgeoning size and influence of government (which is the cause of the burgeoning national debt) amounts to theft — period:

1. Government spending (whether financed by taxes, borrowing, or money creation) commandeers resources that could have been used to produce goods and services in the private sector. Government spending diverts those resources to uses deemed “beneficial” not by producers and consumers but by politicians and interest groups.

2. Some of the commandeered resources are devoted to the payment of government employees for the purpose of making work for them, which includes the  writing and enforcement of regulations that hinder economic growth. Other resources are commandeered for the purpose of transferring purchasing power from productive members of society to less-productive and unproductive ones, thus penalizing and discouraging the traits that drive economic growth: hard work, thrift, innovation, and entrepreneurship.

3. The net effect  — near-term and long-run — is to reduce total economic output below what it could have been.

In other words, the “stimulus package” doesn’t simply “mortgage our children’s future.”  It does a lot more than that. Like all government spending that isn’t undertaken for the protection of Americans from foreign and domestic predators, the “stimulus package” mortgages our present, our future, our children’s future, and their children’s future, ad infinitum. The real problem isn’t the size of the national debt, it’s the size of government.

The best way to stimulate the economy is to reduce the tax and regulatory burdens that stifle hard work, thrift, innovation, and entrepreneurship — words that don’t seem to be in Democrats’ vocabulary. On the contrary, Democrats (Barack Obama, in particular) are bent on increasing the tax and regulatory burdens on Americans, especially those upon whom growth most depends.

As Friedrich Hayek explains, in The Constitution of Liberty,

the illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise. The only major result of the policy has been the severe limitation of the incomes that could be earned by the most successful and thereby gratification of the envy of the less-well-off.

The answer to the question asked at the beginning of this post: The “stimulus package” (and other Obama initiatives) will stimulate a massive growth in the size and intrusiveness of government. Greg Mankiw agrees (here and here, for example).

Further reading:
Curing Debt Hysteria in One Easy Lesson
The Real Meaning of the National Debt
Debt Hysteria, Revisited
Why Government Spending Is Inherently Inflationary
Joe Stiglitz, Ig-Nobelist
A Simple Fallacy
Ten Commandments of Economics
Professor Buchanan Makes a Slight Mistake
More Commandments of Economics
Productivity Growth and Tax Cuts
Risk and Regulation
Liberty, General Welfare, and the State
Do Future Generations Pay for Deficits?
The Laffer Curve, “Fiscal Responsibility,” and Economic Growth
And much more, here.