Noah has a good post about income and wealth https://www.noahpinion.blog/p/theres-not-that-much-wealth-in-the
that is good background for a point I constantly make about how fiscal policy can contribute to higher incomes and greater wealth by avoiding deficits. Deficits do reduce income and wealth of future generations, but it is NOT that the future "they" will have to pay interest or pay off the debt created. Interest income paid by the government is interest received by someone in the private sector and government debt is some private person's asset. It IS true that we "owe it to ourselves," so what's the problem?
Simple! [OK, maybe not simple.]
When the government spends money and runs a deficit/issues debt to finance the expenditure, someone buys that new debt. And that someone would presumably have bought some other asset that would have financed some other expenditure. This is the financial flow that represents real productive assets being used to produce what the government was spending on instead of producing whatever the debt purchaser would have spent on. [That these alternative expenditures/resource uses may be carried out at many persons removed from the first recipient of the government expenditure and the initial purchasers of the government debt should not distract from the underlying alternative use of resources.]
So far, we have just looked at alternative expenditures/uses of resources. How does that affect future income and wealth? For that we need to consider what kind of resource use is involved. It's not controversial I hope to claim that most government expenditure is consumption or at least is not investment. This is not an accusation. It's perfectly OK (at least with me) for the government to pay social security benefits or send military aid to Ukraine. But that is not investing in things that will yield income in the future. It is also not controversial, I hope, to claim that most private debt is created to finance assets that will yield future income. Thus, in general government expenditures that creates a deficit (is financed with debt) has the net effect of drawing resources that would have produced income in the future to uses that do not. The future income foregone is the “burden” that deficit spending today creates.
This analysis also shows when and how government deficits might NOT create a future burden: when they finance high-yielding public investments, like the long-delayed improvement in air traffic control or new systems to detect tax fraud. Those lead to higher future incomes and greater wealth.
Thus far we have looked at how given combinations of pubic expenditures and deficits do or do not create future income, contribute or do not contribute to real growth of the economy. Let’s now turn to a different set of alternatives: financing expenditures with deficits or with tax revenues. As with deficits, the key is how the revenuer collected by a tax would have been used if there were no tax. Here the answer is more complicated as it depends on the tax, but in general tax payments come out of, reduce, both consumption and savings in contrast with government debt purchases that come mainly from savings.
And there are ways to make tax collection fall more on consumption and less on savings while preserving progressivity.
1. Shift from wage taxation to a VAT for financing the safety net – social security, Medicare/Medicaid/ ACA, unemployment insurance.
2. Shift from deductions to partial tax credits as a way to incentivize favored kinds of consumption like mortgage interest and charitable contributions.
3. Impute business income to owners’ personal taxation.
4. Tax indexed capital gains, as ordinary income while not rebasing on inheritance.
5. Tax personal consumption rather than personal income by deducting amounts saved or invested and reinvested, adjusting rates to compensate for the smaller base.
Putting the two parts together gives us principles for fiscal policy for growth with equity.[1]
1. Raise revenues with progressive taxes on consumption.
2. Keep deficits less than public investment.
Image Prompt: Gold coins being pushed into a void by a machine labeled “Deficit.” (not “Deeficit” ???)
[Standard bleg: Although my style is know-it-all-ism, I do sometime entertain the thought that, here and there, I might be mistaken on some minor detail. I would welcome comments on these views.]
[1] At the risk of a smidgen of partisanship I would point out that the tax cuts of Reagan, GW Bush, and Trump diametrically violate these principles.
Great point about opportunity costs. I'm keeping the bullet list. 🙏
Hutcheson writes "When the government spends money and runs a deficit/issues debt to finance the expenditure, someone buys that new debt. And that someone would presumably have bought some other asset that would have financed some other expenditure."
Not necessarily. Between then end of 2018 and the end of 2022, between 64 and 71% of ourstanding federal debt was held by foreigners or the Federal Reserve. The Federal Reserve created the money used to purchase that debt and had they chosen not to do so, they wouldn't have create the money at all, there is no alternate investment they would have made.
As for the foreign buyers, I would point out that the US runs a large trade deficit, and has for many years. Trade deficit means that the US is exporting dollars to foreign entities. So what do they do with the dollars? They could spend the dollars to buy US goods and services but if they did this there would be no trade deficit., which isn't the case so they obviously don't want to do that. They could exchange the dollars for their home currency and use that to buy domestic goods and services. But if they did that the value of the dollar would fall, US exports would become more competitive, and the trade deficit would go away. That hasn't happened, so clearly foreign dollar holders don't want to convert their dollars into goods and services (i.e. utility). What they do is buy US Treasuries.
Now these Treasuries are worthless to them, because all they get if they sell them is dollars. The same damn thing they shoved into the Treasuries in order to do something with them. They stash the dollars here because their value changes according the real rate the Treasuries pay, which is usually positive, so it's a safe place to stick the dollars. There really isn't any place to put them.
So here we see that that majority of buyers of government bonds are no using funds that could have been put into productive investments in the US. But even the domestic investors are probably mostly banks, pension funds and insurance companies. If they didn't buy the Treasuries, they would probably buy stocks, in which case the money would go the previous owner of the stock and the money used to buy another stock. So the alternative to a bigger National Debt is a bigger stock market capitalization.
There is really very little funds being invested in Treasuries that would otherwise go to productive investment. If there were productive investments not being made for lack of funds, they why have only 0.8% of corporate earnings over the last six years been retained for possible productive investment?
https://mikealexander.substack.com/p/why-progress-seems-stalled#:~:text=Table%201.%20Earnings,One
What you are talking about is the traditional concept of public borrowing "crowding out" productive private borrowing. This may have once been true, but it is no longer true and hasn't been for a long time.