Friday, May 26, 2017

More Taxes or More Borrowing are Both Immediately Bad

"which means there will be no cut in government spending"
This is the heart of the problem, whether the spending is paid for by taxation now or by new borrowing. Though, I suppose I slightly prefer the latter, since the fool who loans the government more money will get stiffed, while if it's paid for by taxation, I get stiffed.
I have discussed this view before, It is incorrect but it requires further comment since it is a prevalent view.

Taxation or government borrowing hurt the overall economy immediately---borrowing does not put the pain into the future. With taxation it is noticed immediately, that is, the taxes are taken directly from our paychecks.

Government borrowing is not as easily noticed with regard to its immediate impact, it is thought of only as "a debt our grandchildren will owe."

But when the government borrows, one of two things occur, Either savings are diverted to government borrowing, that is crowding out private sector borrowing, or the Federal Reserve monetizes the debt by printing new money.

If the Fed monetizes the debt, that means the government has more funds to bid for goods and services against consumers. It is an immediate hidden tax against consumers as prices are higher because of the government bidding.

If government borrowing occurs, it results in less funds available for private investment. This means less investment in capital goods which means less consumer products are made. Thus also immediately impacting consumers.

Holders of government bonds almost always get paid back, unless it is a final crisis stage.  They get eventually paid back by new taxes, new borrowing or Fed debt monetization, a circle within a circle.

But this is later stage stuff. In the here and now, government spending, regardless of how it is funded, hurts consumers immediately.

The classic guns versus butter model of the production possibilities frontier is useful in understanding this. Think of gun spending as government spending and butter spending as private sector spending.

The more spending (regardless of how it is funded) on guns (government) the less is available for butter (private sector) production.

The eye should always be on TOTAL government spending because it means there is less for the private sector immediately one way or another.

-RW 

6 comments:

  1. The eye should always be on TOTAL government spending because it means there is less for the private sector immediately one way or another.

    Nothing I said in my comment, which you quote at the top of this piece, contradicts this statement. In fact, I explicitly said "[Government spending] is the heart of the problem, whether the spending is paid for by taxation now or by new borrowing."

    borrowing does not put the pain into the future.

    Where did I say it did? The only distinction I made was who gets shafted. It seems very clear to me that holders of government debt will eventually get stiffed. And that I'd prefer that to me getting stiffed.

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    1. Robert's argiment is that ypu will be stiffed either way. One way is by being taxed, the other because of currency debasement and inflation.

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    2. Robert's argiment is that ypu will be stiffed either way. One way is by being taxed, the other because of currency debasement and inflation.

      I agree, as I hoped my earlier comment(s) made clear. It's still the case that if $1000 is pulled from someone else's pocket rather than mine, I'm ahead compared to the reverse.

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  2. "If the Fed monetizes the debt, that means the government has more funds to bid for goods and services against consumers. It is an immediate hidden tax against consumers as prices are higher because of the government bidding."

    While, in many ways, it's the same thing, and winds up at the same place, I think it's clearer to say that Fed printing devalues everyone's money making prices rise. I think this view is also slightly more correct. Even if the government only used the newly-printed money for militarism, for instance, prices would rise across the board -- not just for military equipment.

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  3. The slight advantage of borrowing is that when The Big Stiff occurs, it might make the banksters and patriotic grandmas think twice for a few years before buying more of the crap paper Uncle Sam is selling them.

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  4. @JdL

    That argument only applies in the event of default, which I guess is a nonzero possibility given candidate Trump's public statements. Otherwise, debt is eventually footed by the taxpayer.

    Another argument against debt is that it's more surreptitious than a tax so it enables higher spending in the first place.

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