In her excellent podcast, The Great Antidote, Juliette Sellgren often asks her guests to name one thing that they once believed to be true but no longer do. It’s a good question. Intelligent people are people who learn, and it’s practically impossible to learn without at least occasionally discovering that something that you once were quite confident is true is likely to be false.
Having now reached the age of 67, I would be embarrassed to look back on my career only to discover that I’ve changed my mind about nothing over these many years. Fortunately for me, I have indeed changed my mind about several substantive matters.
For example, I once believed, like Milton Friedman, that among the most effective tools for reining in excessive government growth is to “starve the beast” – that is, to keep tax revenues as low as possible. Starved of tax revenues, big government would have no choice but to shrink into smaller government, one that can survive on appropriately small sums of revenue.
I no longer believe that this theory of “starving the beast” is correct. It’s now obvious to me that as long as the government can finance its current expenditures with borrowed funds, a policy of refusing to allow taxes to be raised in order to meet expenditures doesn’t starve the beast; that policy engorges the beast.
The reason the government is engorged when tax revenues are kept below expenditures is that, as a result of this policy, much of current government spending is paid for by future taxpayers-citizens. The debt that the government issues to fund current expenditures comes due in the future, when many of today’s taxpayers-citizens will either be in lower tax brackets or their graves. The burden of repaying this debt falls on many people who aren’t even born when the debt-financed expenditures are made. The bottom line is that deficit financing allows today’s taxpayers-citizens to get goodies from the government and then shove the bill for these goodies onto tomorrow’s taxpayers-citizens.
Because deficit financing allows today’s taxpayers-citizens to spend other people’s money – and because no person spends other people’s money as carefully as that person spends his or her own money – the demand for government ‘services’ today is higher than it would be if today’s taxpayers-citizens were obliged to pay for all the government they demand. Just as, say, people in New York and California will demand more government services if those services will be paid for largely by people in Florida and Texas, people in 2026 will demand more government services if those services will be paid for largely by people in 2056.
Unsurprisingly, there is empirical evidence showing that attempts to starve the beast result in increased government spending.
The beast of big government is far more likely to be starved, or at least kept on a leaner diet, by a strict budgetary rule that requires that all current expenditures be funded with current revenues – revenues gotten either from current taxes, from cuts in government spending on particular programs, or from sales of public lands or other government-owned assets. Were taxpayers-citizens obliged to pay today for what they consume through government action today, they’d be much more likely to resist increases in government spending.
For anyone who prefers to keep government small and limited, this case for a balanced-budget rule is very strong even if we could be 100-percent assured that no amount of deficit financing would ever lead to a fiscal crisis, or lead even to higher rates of interest. Yet in fact no such assurance is possible even in the best of all possible circumstances, and less so when today’s taxpayers-citizens can live at the partial expense of tomorrow’s taxpayers-citizens. If Sam can easily borrow from Sarah and then shift onto Tom the obligation to repay the debt, Sam will – you can bet on it – spend and borrow beyond his means to repay.
The resulting waste of resources from Sam’s excessive spending will necessarily make the economy of which Sam is a part grow less than it otherwise would, and perhaps even to shrink. And so when Tom, years later, enters the ranks of taxpayers-citizens, there’s a real prospect that his ability to service the debt that Sam, years earlier, imposed on him will be compromised. If Tom, too, has access to deficit spending through government, he, like Sam, will deal with his fiscal burden by passing it on to as-yet-unborn Nancy and her generation.
At some point, this effort of current generations to live at the expense of future generations will raise the national debt to a level that’s unsustainable. Creditors will notice this risk and begin demanding higher interest rates – which only further increases the fiscal burden on current taxpayers-citizens. This fiscal rot stands a good chance of suddenly snowballing, prompting the government to resort to a policy of high inflation or even to repudiation of its debt.
Deficit doves will protest. They’ll say that as long as creditors are willing to lend, no problem is afoot because creditors’ self-interest prevents them from lending money to any entity that they believe is unlikely to repay. The trouble with this point is its factual record. History has no shortage of fiscal crises featuring governments suddenly unable to service their debts.
Again, however, even if a magnanimous supernatural entity promised that no ratio of government debt to GDP would ever trigger a fiscal crisis, the case for requiring that current tax revenues match current government spending would remain strong because such a requirement would serve as a powerful check against excessive growth of government.