“The deficit is not a meaningless figure; only a grossly overrated one.”
Robert L. Bartley, The Seven Fat Years
It was the largest non-bank debt deal in U.S. history… The company was Apple, and it was 2013. The Cupertino, California-based technology behemoth was riding a lucrative sales wave created by feverish global demand for its iPhones. Apple subsequently floated $17 billion worth of debt at rates of interest almost equal to what is charged to the U.S. Treasury, which borrows at the lowest rates in the world. Investors were more than eager to own a piece of the company’s future earnings.
Last month, President Joe Biden imposed sanctions on Russia that included limits on U.S. financial institutions making markets for debt issued by the country’s government. Presently, Russia has 14 trillion (rubles) of total debt, which amounts to $190 billion.
There’s a budget deficit lesson in these unrelated anecdotes, though probably not the one you’ve been conditioned to believe…
(Full disclosure… What you’re about to read is not a defense of government spending or deficits. Government spending is a cruel tax on growth. Period.)
In reality, Apple’s massive bond offering and Russia’s small (relative to the U.S.) liabilities were and are a resounding rejection of much of the conventional wisdom surrounding government debt. The Left and Right preach that it results from insufficient tax revenues relative to spending, only to promote opposing policies meant to increase revenues. Their analysis is precisely backward… To see why, it’s useful to start by addressing the popular view that deficits signal country decline.
That’s how all-too-many economists and policy theorists on the Right who fancy themselves deficit and debt “hawks” view government debt. Niall Ferguson, a Hoover Institution senior fellow, wrote in 2013 about U.S. liabilities in a Wall Street Journal op-ed, lamenting that “it is not if the United States will default, but when.”
Fast forward to 2018, and in a piece written for the Washington Post, Ferguson’s Hoover colleagues Michael Boskin, John Cochrane, John Cogan, John Taylor, and the late George Shultz professed that “high and sharply rising government debt” stands “squarely in the way of the U.S.’s extraordinary promise.” And just two months ago, in a piece for National Review, conservative champion Kevin Williamson contended that “unless we get our fiscal house in order now, we will soon be at the mercy of our creditors.”
Of course, the problem for the downcast economic eminences is that markets plainly mock their concern. We know this because as previously indicated, the U.S. Treasury borrows at the lowest rates of interest in the world. More on borrowing rates in a bit, but for now, it’s useful to clarify that budget deficits and debt don’t signal economic Armageddon as so many conservatives believe… quite the opposite, really.
If anything, the ability to take on sizable levels of debt is a sign of prosperity; that lenders believe their odds of being paid back are very high. Seriously, who out there lends cheaply without caring if they’re paid back?
If anything, the ability to take on sizable levels of debt is a sign of prosperity; that lenders believe their odds of being paid back are very high. Seriously, who out there lends cheaply without caring if they’re paid back? Looked at without emotion, an ability to borrow in size is logically a bullish market projection about the borrower’s future prospects.
This is similar to how Apple’s capacity to access $17 billion at near-Treasury-like rates was a direct consequence of investor confidence in its ability to earn copious sums in the future. And Russia’s nominally microscopic obligations are a sign not of parsimony with the money of others on the part of Vladimir Putin, but rather a market data point indicating that lenders aren’t particularly bullish on Russia’s economic prospects. Conversely, that lenders line up to buy Treasury debt at very low rates of interest is a sign of investor confidence that dollars will be flowing into Treasury’s coffers in impressive amounts for decades to come. (See the low yields on 30-year U.S. Treasuries if you’re still skeptical.)
Now, I want to emphasize… This shouldn’t be construed as an endorsement of government borrowing, and it’s certainly not a call for more government spending.
On the other hand, much of the alarmism about debt and deficits is rooted in simplistic thinking… This should be properly viewed as a rejection of all the handwringing on the American Right about deficits and debt, and how they signal “doom” (Mark Steyn) for the United States. More realistically, they signal powerful investor optimism about the U.S.’s economic future.
Translated for those who need it, the United States can borrow in size because it’s backed by the most dynamic economy in the world. Russia’s capacity to borrow is highly limited precisely because its economic prowess in no way resembles that of America.
Translated for those who need it, the United States can borrow in size because it’s backed by the most dynamic economy in the world. Russia’s capacity to borrow is highly limited precisely because its economic prowess in no way resembles that of America. Put another way, an inability to borrow is the truly bearish market signal.
So while members of the Right well overdo it when they embrace hysterical rhetoric about federal borrowing that foretells “crisis,” their reliably confused opponents on the Left hardly elevate the discussion. Though the piling on of debt isn’t the perilous indicator that conservatives claim it to be, it’s most certainly not the driver of economic growth that Lefties naively claim.
Along those lines, rare is the op-ed by New York Times columnist Paul Krugman that doesn’t include some call to increase U.S. deficits as a way of boosting the economy. As he observed in a column from 2020, “The only thing we have to fear from deficits is deficit fear itself.” The Princeton economist’s point was that “we can and should spend whatever it takes” whenever the U.S. economy is limping. He’s not alone in his thinking…
To William Galston, Jason Furman, Christina Romer, Stephanie Kelton, and countless other Left-wing economic eminences, the easy solution to slow growth is deficit spending. Looking back to Barack Obama’s presidency, his economic advisers were said to have had “Rooseveltian fantasies” dancing in their heads as they rhapsodized about job creation care of the federal government. Romer in particular squealed with delight at how $100 billion of borrowed money could create 1 million jobs at $100,000 per. In Romer’s words, “A million people is a lot of people.” You can’t make this up!
To members of the Left, the answer to slow economic growth is always and everywhere borrowing and spending. This was true in 2009 after Obama was inaugurated, and it’s the expressed view in 2021 with Biden in the White House. But the thinking isn’t credible… To see why, consider yet again why conservative alarm about deficits is so wrongheaded.
It is simply because countries, like individuals and businesses, are once again able to run up debt based on investor optimism about their present and future economic prospects. Confidence about present and future economic growth is what enables the borrowing… meaning the growth already occurred. Government borrowing is a consequence of economic growth, or growth that will take place in the future, which means that borrowing amounts to politicians taking a piece of the fruits of the growth and redistributing it.
The U.S. can borrow in gargantuan amounts because investors strongly believe that Treasury tax collections now, and in the future, will be much greater than gargantuan. Russia can’t borrow at all like the U.S. can because investors have precisely the opposite view of present and future Russian tax collections.
To believe then, as Krugman and others do, that the borrowing and spending boosts economic activity is to believe that Nancy Pelosi, Kevin McCarthy, Chuck Schumer, and Mitch McConnell are better allocators of precious resources than Jeff Bezos, Mark Zuckerberg, and Apple CEO Tim Cook. But such a view can’t be serious… Central planning that doesn’t work in total most certainly doesn’t work in limited fashion.
Growth is yet again what enables government borrowing, so to pretend that the borrowing adds to economic growth is a monument to double counting that would cause even the crooked among us to blush.
Furthermore, it brings new meaning to fuzzy math. Growth is yet again what enables government borrowing, so to pretend that the borrowing adds to economic growth is a monument to double counting that would cause even the crooked among us to blush.
Goodness, if government borrowing and spending actually boosted growth, West Virginia would presently be one of the richest U.S. states. Showered with endless largesse over the past few decades thanks to the late Robert Byrd’s immense power within the U.S. Senate, West Virginia remained poor despite it all.
Though politicians can redistribute wealth, they can’t control where it ultimately migrates to once it’s consumed. Applied to West Virginia, Byrd directed tens of billions of taxpayer wealth to his constituents, they spent it, only for the funds to flow to more productive commercial concepts well outside of the state. Paraphrasing legendary former Citibank CEO Walter Wriston, money goes where it’s treated well.
To believe that deficit spending stimulates economic growth is the hysterical equivalent of believing that during periods of economic weakness, theft should be legalized. Back to reality, governments can only spend what they’ve extracted from the private economy first… thus dampening economic dynamism thanks to the politicized allocation of precious wealth.
The True Meaning of Money
The problem yet again is that whether Left or Right, conservative or liberal, free-market or interventionist… neither side understands the why behind deficits – or the meaning of money for that matter. To see why, it’s useful to tack back to the free-market Right, and prominent Austrian School thinker Guido Hülsmann. While Lefties naively assert that deficit spending is the source of prosperity, their free-market counterparts believe – if possible – in something that is perhaps even more absurd: that deficits have an unlimited quality to them… like central banks armed with printing presses.
According to Hülsmann, “… fiat money allows the government to take out loans to an unlimited extent because fiat money by definition can be produced without limitation, without commercial limitation or technological limitation, and can be produced in whatever amount is desired.” If Hülsmann is to be believed, central banks enable unlimited borrowing and spending. Government forever, or something like that. Not really…
Implicit there is that the total Russian country debt that amounts to a U.S. Treasury rounding error is small due to parsimony on the part of Putin et al. Try not to laugh. In truth, Russia has very little debt because even before U.S. sanctions, there wasn’t much of a market for it, nor is there now. Investors aren’t exactly frothing at the mouth to own the future tax revenue streams of a country that’s not terribly innovative. Quick, name one Russian-made product that is well-regarded by the most acquisitive consumers (that would be American consumers) in the world. Tick tock, tick tock.
Something else that is crucial for the purposes of this essay is that Russia has the Russia Central Bank (“RCB”), a fiat-money-producing central bank, but that doesn’t enable government “without commercial limitation or technological limitation” as imagined by Hülsmann. What’s a creation of government if you can’t prop up government? Translated for those who need it, government can’t enable more government via the printing press. Only markets can enable more government borrowing, and presently there’s little market appetite for future Russian government income streams.
At which point it’s useful to further explain to readers why Hülsmann’s allegedly free-market views don’t stand up to the most basic of scrutiny. They don’t, simply because no one earns money, pays out money, borrows money, or lends it. If the previous assertion is hard to countenance at first glance, please stop and think about it. Though “money” factors into all of our economic activity, it’s important to stress that we earn, pay, lend, and borrow what money can be exchanged for. Money is merely an agreement about value among producers that facilitates the exchange of actual market goods.
Fairly explicit in Hülsmann’s theorizing is that money creation is the same as resource creation… that wealth can be printed. Except that it can’t be, which means central banks armed with printing presses can in no way enable government without limitation. Never forget that when investors buy debt, they’re buying future income streams paying out currencies that can be exchanged for market goods.
Hülsmann’s reasoning implies that those goods can be printed or summoned by the creation of “money.” In other words, Hülsmann asserts that markets are shockingly stupid whereby the producers of goods and services would actively exchange what’s real for paper rapidly produced by central banks. No, markets are rather wise… Money is a logical corollary of production, not an instigator of it.
Applying this simple logic to the U.S., it’s not the Fed enabling the growth of the federal government… but rather the U.S. political class has arrogated to itself a piece of the world’s largest economy. Borrowing by the U.S. Treasury is yet again a consequence of U.S. prosperity, much as Russia’s very limited borrowing capacity is a consequence of the country’s poverty relative to the U.S.
Moving back to Left-wing mythology, that Russia’s borrowing is limited in concert with seemingly unlimited borrowing for the U.S. is a pretty resounding rejection of all the whining every time members of the Right call for tax cuts. The routine reply from the Left is that tax cuts “for the rich” will “blow out” the deficit… the implicit argument being that tax cuts reduce revenues only to necessitate more borrowing. The view is backward.
Once again, government borrowing, like corporate borrowing, is enabled by expectations of rising tax revenues in the future. With tax cuts, reduced barriers to production logically redound to economic growth that renders the growing nation more attractive to lenders who want to be paid back. Deficits paradoxically signal a revenue problem, albeit one of too much revenue now, and in the future.
Market signals support the above contention. Consider the borrowing costs for the U.S. Treasury over the last 41 years. In 1980, total federal debt was roughly $900 billion, but the yield on the 10-year Treasury note was 11.5%. In 2021, and with the U.S. nearly $30 trillion in arrears, the yield is 1.64%. And no, the Fed didn’t do this. Government once again can’t support government, after which it’s always worth bringing Russia back into the mix. If central banks could make borrowing simple, then logic dictates Putin would have the RCB working the printing presses non-stop. It would be a waste of paper and electricity. “Money” quite simply has no use without production first.
It’s the Spending, Stupid
The funny thing about deficits is that both sides have trotted out the trite line over the decades about how we’re “burdening our grandchildren” with our borrowing. Both sides once again miss the point… Their misery about borrowing presumes that we’re having a raucous, joyous party now that will be paid for by future generations. That’s just silly…
The burden for our grandchildren isn’t debt as much as they’re inheriting from us a much less evolved society – technologically, culturally, and surely in terms of health care advances capable of turning today’s killers into tomorrow’s afterthoughts.
The burden of spending is felt right here and right now. Think about it. Politicized allocation of precious resources limits innovation and limits opportunity born of innovation. Government spending is always, always, always a tax that is paid right away. The burden for our grandchildren isn’t debt as much as they’re inheriting from us a much less evolved society – technologically, culturally, and surely in terms of health care advances capable of turning today’s killers into tomorrow’s afterthoughts.
It cannot be stressed enough that total dollars spent by government is the only number that matters, not whether the spending is a consequence of a budget “in balance” or from borrowing. To see why, consider Medicare…
Rolled out after a surge of tax revenues that resulted from the economy-boosting Kennedy/Johnson tax cuts, Medicare began as a $3 billion program. The projection in 1965 from House Committee on Ways and Means was that the entitlement would cost taxpayers $12 billion by 1990. The actual cost was $110 billion. It rose to $511 billion in 2014. By 2019 the number had risen to $799 billion, with no end in sight.
It’s a reminder that a focus on a balanced budget with the “grandchildren” in mind doesn’t even pass the “grandchildren” test when it’s remembered how the cost of government programs just grows and grows. A revenue surge “paid” for Medicare 56 years ago, but the burden is very much ours now.
Do deficits matter? No. On their own, they’re an obvious signal of investor optimism about a country’s future prospects. Deficits only matter to the extent that all government spending is deficit spending since governments only have money to spend insofar as they legislate to themselves a percentage of actual economic growth.
It’s the spending, stupid. Let’s please stop focusing on the logical market consequences of ferocious growth (once again, a growing capacity to borrow), and instead direct all of our energy toward shrinking the economy-sapping tax that is government itself, and that has Pelosi, Schumer, and Biden in control of trillions worth of wealth that they had no role in the creation of.