Deficit Financing Fuels Excessive Government Growth

(Don Boudreaux)

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Here’s a letter to someone whose “commitment to individual freedom leads [him] to skepticism of deficit hawks”:

Mr. C__:

Thanks for your e-mail.

You write, in response to this piece on government indebtedness, that “there is no good logic to not use debt to pay for as many government programs as lenders are willing to lend for … because lenders lend voluntarily but taxes are forced extractions.”

This argument is made by a surprisingly large number of free-market-minded people such as yourself. I’ll not here repeat all of the several reasons why I believe it to be mistaken, but I will repeat one: Government’s size and influence over the lives of citizens is not independent of the means of financing government’s activities.

If the size of government’s budget and the length of its reach into people’s lives were determined exogenously –  that is, if this size and this reach would be whatever they are regardless of the source of government’s funds – then the case for maximum possible deficit financing would be stronger. But in fact the size of government’s budget will be larger, and the reach of its activities longer, the less is the resistance of today’s citizens to a growing government.

By relieving today’s citizens of the need to pay fully for government, deficit financing diminishes this resistance. Deficit financing reduces citizens’ actual and perceived cost of expanding government. Thus, deficit financing encourages government to grow larger and more intrusive than it would under a balance-budget constraint.

In short, deficit financing fuels excessive government growth.

Precisely because you want government kept, as you say, “within proper limits,” you should oppose deficit financing and support annually balanced budgets.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030