When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation. Is this really true? I dont think it is because it requires what economists sometimes refer to as the non-Ponzi hypothesis. Which is to say, its only true if we expect that the government will eventually pay off all of its debt. To the extent the government doesnt repay all its debt in full, or if it rolls its debts, theres no need for taxes (or inflation) to rise. I do not understand why anyone would suppose that the US government will eventually be debt-free. I think its possible that might happen in the unlikely circumstances that we elect political leaders who undertake a no debt policy. But thats only a possibility, an uncertain contingent future. It seems far more likely that our political machinery will continue to produce policies that include government borrowing. Try this as a thought experiment: when our republic perishes, as all human organizations do, do you think it will be debt free? Or is it more likely it will leave some debts unpaid in the end? Theres very little evidence in history or experience to suggest that the non-Ponzi hypothesis is applicable to the United States. Which means, there is insufficient grounds for affirming the notion that all government spending will be paid for through taxes or inflation. Ive heard economists claim that without the hypothesis, government debt wouldnt have value. But thats silly. First, corporate bonds have value and big corporate debtors do not typically pay off all of their debt. They roll their debt. They refinance. They default. But they dont usually go to zero debt. Everyone knows this but people still buy corporate bonds. Second, government bonds do have value despite the fact that the non-Ponzi hypothesis appears not to be true. If your theory tells you water shouldnt be wet, I suggest its built on sand. Theres also the problem of growth. When you issue debt with a fixed principal and fixed interest rates, you can pay off that debt without inflation or higher tax rates because your current tax rates will generate more revenue in a bigger economy. But lets say this is true. Or true-ish. Some of our debt may be paid for with taxes or ameliorated with inflation. Actually, some of it almost certainly will. But that tells us nothing about whether we should borrow today. Its very possible that in the future well want higher inflation, in which case todays borrowing would have been consistent with our goals. Right now our economy is producing inflation below levels many think are desirable. Were below the Feds target. So perhaps wed be better off if we had borrowed more in the past. From a libertarian point of view, any constraints debt places on additional government spending are a feature, not a bug. If we cant build bridges to nowhere because paying bond holders is a very large part of our budget, thats cause for celebration.
Posted on: Tue, 22 Apr 2014 15:23:02 +0000
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