It's the Spending

At the school where I used to teach economics, I became faculty advisor for our university's Students In Free Enterprise chapter. One special competition at which our team always excelled was the "Halt the deficit-Reduce the Debt" competition. The object was to educate the community on the evils of the national debt and deficit spending. It is almost quaint to think that back during the Clinton administration SIFE ended the competition by declaring victory after on official surplus. (By official I mean that it doesn't include the off-budget spending. If one compares total government receipts with total government spending, we did not run an actual surplus even then.)

Then Bush was elected and deficit spending was back on the agenda and following the massive fiscal stimulus spending coupled with large decreases in tax revenues due to the Great Recession, once again we are seeing astronomical budget deficits, pushing the national debt higher than it has ever been. It is understandable, then, that many people are concerned about the mountain of debt the U.S. Government it taking on and there have been many calls for fiscal austerity. Even President Obama, author of a significant part of our present debt has tried to appear deficit savvy by setting up a commission to investigate debt reduction. When it comes to policy alternatives to accomplish the goal, everything, it is claimed, is on the table. Most recently Obama said he opposed continuing the Bush tax cuts because he says we "can't afford them."

The danger in all of this is that such concerns can easily become misguided, viewing the deficit and debt per se as the real economic culprits. Consequently, people can fall into the trap thinking that as long as we balance the budget and begin paring down the debt by any means necessary, then we will get back to prosperity. There are two ways to reduce the deficit, however. One is beneficial for economic activity and society, the other is destructive.

Cutting government spending benefits society by reducing the amount of money taken out of the private productive economy, allowing for more saving and investment in capital to be used in profitable production. Consumers are then able to obtain more goods at lower prices, leaving them better able to effectively meet more of their ends.

Reducing the budget deficit by raising taxes does just the opposite. As Murray Rothbard explains in his classic "Ten Great Economic Myths" included in his popular Making Economic Sense,

Curing deficits by raising taxes is equivalent to curing someone’ bronchitis by shooting him. The “cure” is far worse than the disease. . . .if taxes go up, your money is expropriated for the benefit of politicians and bureaucrats, and you are left with no service or benefit. The only result is that the producers' money is confiscated for the benefit of a bureaucracy that adds insult to injury by using part of that confiscated money to push the public around. No, the only sound cure for deficits is a simple but virtually unmentioned one: cut the federal budget. How and where? Anywhere and everywhere.