For many, economic logic and application to a wise management of finances is a chore considered best left to the professionals. After all, crunching numbers given the vast array of rules and regulations can be taxing (pardon the pun). However, debt finance is a particular economic subject that can be easily understood and just as easily applied by Joe Some as Joe Business. Living within your means is an adage that were all familiar with. We may not always do it, but we can generally all agree with and understand the principle. Furthermore, its a lesson that holds just as true for the individual as it does for the city, state, and federal government.
The primary lesson to draw from the understanding of deficit finance is that the debt obligations shift the burden of payment into the future. Tomorrows generation will bear the costs of todays debt-financed projects. We know this intuitively from our own experiences. For instance, remember when you splurged for the three-course dinner with a friend at your favorite five-star restaurant? Many hours (and expensive cocktails) later, you and your friend cap off a celebration of her new job with spoonfuls of tiramisu. With ease, you happily sigh and slide your card on top of the check for the both of you. Three weeks later, youre nervously sighing over the latest VISA bill and wondering how did it get so high? You may remember the good company, but have just the faintest recollection of the tiramisu.
Unfortunately, such an experience of spend then think, incur and forget has been a familiar practice in the halls of Congress. Just recently, Washington passed a measure that would allow them to increase their credit limit, or amount of debt they can accumulate, to nearly $14.3 trillion, equal to approximately 100% of the U.S. gross domestic product (GDP). During the first six months of the current fiscal year, October through March, interest on the debt cost taxpayers some $202 billion. Can you remember any federal ventures that seemed worthy of such undisciplined spending? They probably cant either.
Fiscal reform is meaningless if Congress excludes debt service from the commissions considerations. The real trouble, however, is that budget deficits are not an isolated ailment. Deficit spending is a symptom of a much larger structural problem. Just as shop-o-holics battle an addiction to this seasons Gucci line, spend-hungry bureaucrats are caught in the webbed machinery of politics. The nature of the political process is myopic spending on the behalf of special interests at the expense of the public.
As consumers, when we finance things on personal credit, our future-selves bear the cost of what our current-selves get to enjoy. Experience and prudence teach us to responsibly govern the passions of our current wants so as not to jeopardize our future needs. One type of constraint we acquire (usually one-too many tiramisus later) is to avoid financing things that we can no longer consume when the bills arrive. Going out to fancy dinners is a poor use of credit because the wining and dining is long over by the time we end up payingmonths and sometimes years later. In other words, wisdom wills us to pay cash for current consumptions and reserve our credit for longer-term investments that allow for incremental consumption over time.
In the context of the federal governments budgetary operations, debt-financing works the same way. When mismanaged, we shift the burden of payment to those who werent even able to enjoy the consumption of the project or investment. Those who argue that debt and taxes are interchangeable fiscal instruments assume that politicians will equally apply taxes and the use of credit when paying for new projects. Politicians are well-aware that they can maintain a happier constituency when theyre not forced to stick their voters with the bills. Thus, these politicians are more inclined to run up the credit to avoid the levying of taxes. Sadly, but similarly, we the people will likely not protest because we also enjoy the ability to buy now and pay latereven, unfortunately, when we know that our children will have to pick up the tab.
You cant get something for nothing. How many times have we heard this? Clearly, not enough for us to change our irresponsible spending habits. Balanced budgets act as constraints against these natural proclivities of politicians and voters. Is democratic reform of deficit finance possible? Yesbut it will take a return to conventional wisdom concerning the proper utilization of credit and debt-management before we can get the fiscal house in order. Difficult, but not impossible. We understand the fundamentalsand such rules are necessary to prevent our generation from stealing the prosperity of those yet to come.
|Emily C. Skarbek is Research Fellow at the Independent Institute and Assistant Professor of Economics at San Jose State University.|