September 10, 2004


Remember the deficit (Scot Lehigh, September 10, 2004, Boston Globe)

IT'S A lamentable absence in campaign 2004: A serious discussion of the crippling debt this nation is accumulating.

"There are a bunch of goals about how we are going to cut the deficit in half, but no specifics on how we are going to do it," says former Commerce Secretary Peter Peterson, a leading deficit hawk and author of the newly published "Running on Empty," a cogent critique of the nation's fiscal situation.

That failure is worth contemplating during a week when we've just gotten our last pre-election look at the budgetary bottom line.

According to the Congressional Budget Office, this year's federal deficit will hit $422 billion, a record in dollar terms. Further, on our current course, the nation will still rack up a deficit of more than $300 billion in 2009 -- and will add $2.3 trillion in new debt over the next 10 years.

As Republicans proved from 1932 to 1980, debt worries are the last refuge of the intellectually bankrupt.

MORE (via Danny Postel):
Why conservatives must not vote for Bush: A Reaganite argues that Bush is a dangerous, profligate, moralizing radical -- and that his reelection would be catastrophic both for the right and for America. (Doug Bandow, Sept. 10, 2004, Salon)

George W. Bush presents conservatives with a fundamental challenge: Do they believe in anything other than power? Are they serious about their rhetoric on limited, constitutionally restrained government?

Bush appears to have remained strong in the presidential race by rallying conservatives behind him. In his convention acceptance speech he derided Sen. John Kerry's claim to represent "conservative values" and seized the mantle of promoting liberty at home and abroad. Indeed, many conservatives react like the proverbial vampire at the sight of a cross when they consider casting a ballot for Kerry. Tom Nugent, a National Review Online contributing editor, wrote: "The last thing the Republican party needs is the reckless suggestion that conservatives vote Democratic." That is mild, however, compared with the American Conservative Union's mass e-mail solicitation headlined "Why Do
Terrorists Want Kerry to Win?"

Republican partisans have little choice but to focus on Kerry's perceived vulnerabilities. A few high-octane speeches cannot disguise the catastrophic failure of the Bush administration in both its domestic and its foreign policies. Mounting deficits are likely to force eventual tax increases, reversing perhaps President Bush's most important economic legacy. The administration's foreign policy is an even greater shambles, with Iraq aflame and America increasingly reviled by friend and foe alike.

Quite simply, the president, despite his well-choreographed posturing, does not represent traditional conservatism -- a commitment to individual liberty, limited government, constitutional restraint and fiscal responsibility.

Who did squander the Reagan surpluses?

Posted by Orrin Judd at September 10, 2004 10:44 AM

So what you are saying is that since noone can know what government is really doing, or what effect a government inititative will have on the economy, then any worry about deficits is foolish? This has got to be the most intellectually bankrupt position that anyone can take on government spending.

Sure, noone can know precisely how and where every dollar is spent, or precisely what effect a tax cut will have on the economy or the deficit, or precisely how a deficit will impact the economy. But in the macro sense, certain truths hold. Growing deficits are unsustainable. Growing debt service will negatively impact the economy.

You are correct to conclude that because we cannot know the efficacy of government programs, we should let the taxpayers keep as much of their money as possible, and let the invisible hand of the market determine the best allocation of resources, rather than the false vision of government bureacrats. But "letting the people keep their money" also means not incurring debt obligations on their behalf. It means tax cuts AND spending cuts. You can't use the copout "well, we don't know how the deficit will impact the economy, so we shouldn't worry about it". That is an intellectually (and in the long run fiscally) bankrupt position.

Posted by: Robert Duquette at September 10, 2004 11:22 AM

We do know--it has a beneficial impact.

Posted by: oj at September 10, 2004 11:31 AM

Call me simple, but I can't think that spending more than one earns in perpetuity can come to a good end.

Posted by: Jeff Guinn at September 10, 2004 11:38 AM

"We do know--it has a beneficial impact"

Was it a "beneficial impact" as the 1970's were coming to a close?

Posted by: h-man at September 10, 2004 11:42 AM


End? It's a country, not a person. It doesn't end, that's the point. Debt is only a problem if you have to pay it off.

Posted by: oj at September 10, 2004 11:46 AM


The benefit came in the 80s when Reagan radically boosted the debt--we've been in a boom since.

Posted by: oj at September 10, 2004 11:48 AM

The debut would matter more if foreign investors thought there was someplace else in the world where they could put their money and be assured of a secure long-term return on their investment. But as of now there isn't, so they don't, so the deficit at its current level recedes in importance.

Posted by: John at September 10, 2004 11:59 AM

There is a theoretical tendency for deficits to raise interest rates. In practice, it is such a small effect that it has always been swamped by other things happening in the economy. Deficit spending and a national debt at the level we are experiencing, and even much higher, are not correlated with any adverse monetary consequence.

Having said that, deficits can be politically debilitating because they allow the illusion that everyone can get more from government than they put in. All other things equal, that is bad for conservatism, one of the tenets of which is that activist government is a wealth destroyer. All other things are never equal, however, and deficits, in and of themselves, are not, ipso facto, bad government but simply a proxy for bad government.

In other words, arguing against deficits is a convenient tool to use to beat at government spending that we don't like. This program, or that, we argue, are not worth the debt it takes to finance them. There is, though, a flaw at the heart of this argument that has led many so-called "fiscal conservatives" astray. Conservatives are mislead into thinking that it is the debt, rather than the program, that is the problem.

This is clearly wrong. If the government borrows money from me, that is a voluntary transaction in which the government pays me for the use of my money and thus faces more of the real cost of the program. If the government taxes me, then I bear the loss of the foregone interest (and must borrow more myself, or reduce my personal spending, or fail to make an investment) and the government does not see the real cost of its program. (This, of course, assumes, contrafactually, that the government even engages in quasi-cost/benefit, return-on-investment analysis, but that doesn't effect the argument.) In fact, for the finance students among us, I would argue that there is a Miller-Modigliani corralary for government that says that, just as debt and equity financing is the same for a corporation, there is no reason to prefer taxation to debt for financing government programs.

In other words, if a government program is not worth borrowing for, it is not worth taxing for. The conservative response to a bad program is to close down the program, not to raise taxes -- and if a good program requires borrowing, then passing it by to avoid borrowing is nuts.

So, the president's various programs may or may not be good ideas. I like more than I dislike. But the fact that we are borrowing money to pay for them (notice that same assumption) is irrelevent. (If we relax the assumption, we know in practice that if the government weren't spending the money on Iraq and NCLB and prescriptions, it would just be spending it on something else. If the money's going to be spend anyway, I'd rather have it spend on President Bush's priorities than John Kerry's.)

John Kerry provides the perfect example of what I'm talking about. Senator Kerry voted for the $86 billion to fund the Iraqi war before he voted against it. The reason he voted against it was the Senate's rejection of his amendment to raise taxes (he would say "reverse" some of the president's tax cuts) in order to pay for the war. Here, Kerry is at least purporting to believe that, while the war is worth risking American lives, it isn't worth issuing government bonds. Whatever that argument is, it sure ain't conservative.

Posted by: David Cohen at September 10, 2004 1:13 PM

"deficits can be politically debilitating because they allow the illusion that everyone can get more from government than they put in. All other things equal, that is bad for conservatism, one of the tenets of which is that activist government is a wealth destroyer"


The above is a sensible quote from David Cohen. Certainly at any given time the appropriate level of debt is a debatable issue. So while I may disagree with your conclusions as to the ability of the US government to carry greater debt at this time, I can also say that you are correctly stating the appropriate principles that our government should operate under. So you have my moral support.

Regarding OJ's analysis (?) of the government's carrying capacity for debt.. Well to quote the intellectual Dan Quayle "a mind is a terrible thing to lose..ah to never have had..ah to have had and then waste.. ah wasted mind is great to lose" well whatever he said.

Posted by: h-man at September 10, 2004 2:06 PM

Doug Bandow is a good guy, but since he's a libertarian I'll take his recommendations for sound conservatism with a grain of salt, thanks.

Posted by: Matt Murphy at September 10, 2004 2:31 PM

I am in complete agreement with your statement quoted by h-man above. An over-reliance on debt leads to moral hazards, and a feeling that it is ok and proper to regularly defer payments for large scale benefits to be enjoyed today. One outcome of this thinking is to avoid doing the hard cost/benefit analysis that you describe. It is much easier to shortchange this if the payment is deferred into the future, to be faced by future generations (and administrations). Everyone who has a credit card understands how much easier it makes impulse buying decisions. One benefit of pay-as-you-go budgeting is that the administration that proposes the programs will also be forced to answer to the taxpayers for the pain of tax increases during their administration, and do not get to kick the can of accountability down the road to the next guy.

David, I do not agree that there is no difference between debt and tax financing. Over time they must equal out. By incurring debt now, there must be future periods when tax payments must be greater than the benefits gained during that period, because of the added expense of debt service. Debt is an acceptable financing option, as long as it is not understood to be a free lunch, and the calculation of debt vs tax takes into account the long term cost/benefit of debt and not just the immediate benefit of providing a government benefit.

Posted by: Robert Duquette at September 10, 2004 2:39 PM

Doug Bandow is a homosexual libertarian; therefore, it is no surprise that he would be very critical of the Republican Party's conservatism.

Posted by: Vince at September 10, 2004 2:50 PM

Robert: If taxing is better, societally, than borrowing, that implies that taxing creates wealth. Or, that raising venture capital for my new business through armed robbery is better for society than borrowing.

Posted by: David Cohen at September 10, 2004 3:40 PM

In a democracy aren't both consensual?

Posted by: oj at September 10, 2004 3:56 PM

Conservatives For/Against Bush. Don't we agree with Doug Bandow's diagnosis? Don't we merely disagree about what to do with that unpleasant fact, i.e., vote for Bush or not?

Bandow summarizes: "The president . . . does not represent traditional conservatism -- a commitment to individual liberty, limited government, constitutional restraint and fiscal responsibility." Wouldn't Vince accept that characterization of traditional conservatism? From a hetero-, homo-, or simply not-enoughsexual perspective, Bandow's statement doesn't seem too libertarian, insufficiently Burkean.

When I ponder these "conservative disappointments," I then remember: President Bush appointed Leon Kass to chair the Council on Bioethics. Grace alone explains such a choice, which covers a lot of sins.

Posted by: Bob at September 10, 2004 4:13 PM

David, OJ

By maintaining the high (government) debt load, you are increasing the incentive for the government to depreciate the currency to pay back that debt or at least the interest on it. Bad policy to tempt the government in that fashion, since they inevitably do just that. Hence the inflation threat Robert is concerned with.

I could also argue with the issue that govt. expenditures are not capital "investments" as David might be implying, but I won't because presumbably they could be using the funds for appropriate governmental reasons and we would be going in circles about what expenditures they are making that would legitimately be increasing future revenues.

Posted by: h-man at September 10, 2004 4:19 PM


The problem is his misappropriation of Reagan, who ran massive deficits and a global war and restored moral conservatism to the center of the American political discussion. Bush isn't an Eisenhower Republican--he is a Reaganaut.

Posted by: oj at September 10, 2004 4:22 PM


I oppose Rationalism, not rationality. The argument that the debt threatens us with inflation is especially lunatic when the feds announce a record deficit and deflation in the same week.

Posted by: oj at September 10, 2004 4:24 PM

I support rationality, but sometimes it takes a little more effort for some (me) than others.

First, I don't see a significant inflation threat now, but I would see less if our debt was less and more if our debt was great.

Second, inflation doesn't always announce itself as clearly as you imagine. For instance excess money supply in the 1920's didn't seem to result in price increases in comsumer products, but in 1929 some would suggest it showed itself in the mal-investment taking place in the stock market.

Third, since you want to discuss Deflation, what evidence of Deflation are you seeing. Granted that mal-investment did exist in the stock market (from dow 12000 to 7200?), but consumer prices are not decreasing. (maybe 2-4%).

Posted by: h-man at September 10, 2004 4:47 PM

h: Is this deficit really "high", as a percentage of GDP, as a percentage of the budget and in terms of our ability to service the debt? It seems pretty low in world historical terms.

Classicly, government spends money because it can force the free riders to pay. This actually militates in favor of debt-financed spending. A bridge gives equal value each year it is standing. Why should those people who happen to be paying taxes the year it is built pick up the whole tab?

For that matter, we spend money on education in order, among other things, to create a future skilled workforce. This benefits the nation as a whole, but the primary beneficiary is the person educated. Why shouldn't we use debt to have people, in effect, pay for their own education?

OJ: In political theory, by not leaving the state I'm consenting to the state legislature's legitimacy and it's power to tax. blech. From an economic point of view, taxes are not consensual.

As it happens, in Massachusetts taxpayers are allowed to choose to have their taxes computed at a higher marginal rate. No one, other than a few loons (no, not including Senator Kerry), does so.

Posted by: David Cohen at September 10, 2004 5:08 PM

Reagan surpluses? I only remember deficits

Posted by: Harry Eagar at September 10, 2004 10:24 PM

Ever quick on the uptake, Harry.

Posted by: oj at September 10, 2004 11:14 PM

The deficit at $422 billion is about 3.5% of GDP, or about 60% that of the sclerotic nations of Old Europe. When an economy is in need of a fiscal boost, and ours has been for about 5 years, a deficit is OK.

The fault was during Clinton's second term when we were in a boom economy. The correct move here was to run a serious surplus, not the few shekels that were the surplus. The problem is that many of the GOP types, like Domenici, Stevens and Thomas are have all the fiscal discipline of a drunken sailor in a Bangkok whore house.

Posted by: Bart at September 11, 2004 6:31 AM

David, if you are talking about "capital" goods like bridges and education, which will produce economic benefits over time, it makes sense to use debt financing to amortize the cost over its economic lifetime. But the bulk of government expenditures are not investments of this type, they are redistribution, pure and simple. When the Millenial generation starts working in about 10 years, Social Security will start losing money and the difference will be made up through government borrowing, because the government will not be able to force through the necessary FICA increases on them to make the system solvent. We'll just be putting a longer fuse on the fiscal bomb.

Posted by: Robert Duquette at September 11, 2004 11:25 AM

David Cohen:

Taxation is better, societally, because it immediately makes the cost of government known and felt.

If Americans, as a whole, were better at thinking in economic terms, then there wouldn't be any difference.

Posted by: Michael Herdegen at September 11, 2004 4:45 PM

In the looney world of the rightwing economists, the deficits were counted as 'savings.'

Posted by: Harry Eagar at September 12, 2004 6:34 PM

We never pay them, so they are kind of like savings.

Posted by: oj at September 12, 2004 6:42 PM

And if we could get rid of withholding and make people write checks for their taxes, no liberal would ever be elected again.

Let's try this a different way: No cost is too great for the essential functions of government; no cost is so small that we should accept unnecessary government. We need to win the argument about the proper functions of government, not hide behind arguments about the cost.

Posted by: David Cohen at September 12, 2004 8:33 PM

But we pay interest on them, so they are kind of like savings that pay a negative interest rate.

Still a good deal if your reinvestment pays off better, but you're gambling with the rent money

Posted by: Harry Eagar at September 13, 2004 4:10 PM

If you never have to repay the principal it's always a good idea to borrow.

Posted by: oj at September 13, 2004 4:18 PM