Saturday, May 12, 2012

An Example of Debt Hurting Now

One of the themes I have been hammering away at lately is that of government debt and the burden it imposes on us.  It is common to hear people say that we should not keep running up government debt because it is harming future generations.  But my position is that it is not future generations who are paying for it.  The harm government debt brings to future generations is because of the lack of savings and capital investment in the present.

Future generations can simply decide not to pay the debt that was previously run up.  In that scenario, it will be the bond holders who are left holding the bag.  But regardless of how resources are redistributed in the future, government debt is harmful to people in the present day.

For round numbers, the U.S. federal government is currently collecting about $2.5 trillion per year, while spending about $4 trillion.  This leaves a deficit of $1.5 trillion.  (I am just using these as approximate figures, as the yearly deficit is a little lower.)

If the federal government weren't spending that additional $1.5 trillion in deficit spending, then it would instead be left in the hands of people and businesses who would choose to save it, invest it, or spend it.  When the government spends this money, it is being misallocated.  It is not necessarily all going to waste, or even destruction in the case of war.  Some of the money could be going to useful things like roads and bridges.  However, politicians (or anyone else) do not know the preferences of hundreds of millions of people.  So even if you had a group of really smart and really honest politicians, they would not know how to properly allocate trillions of dollars based on the wants and needs of hundreds of millions of people.

Since resources are misallocated, we are all poorer.  Our standard of living is less than it should be.  The government debt and overall government spending is hurting the current generation.

The U.S. government can cover this up for longer because of the Federal Reserve and its ability to create money out of thin air.  But even in the U.S., families are struggling more than ever and it is mostly because of the high levels of government spending and government debt.

A good example to look at right now is Greece.  It is a real world example of how massive government debt hurts right now.  The people living in Greece right now are not worried about future generations having to pay down the debt.  The debt will be gone anyway when the Greek government defaults in full.

The Greek people are suffering right now because of the massive debt and massive government spending.  The standard of living for the average Greek resident has fallen substantially.  Some people are just struggling to put food on the table.  The government has made so many promises (that can't be kept) and has spent so much money (misallocated resources), that it has actually led to a decline in real wealth.  They are paying the price right now, in the form of poverty.

As the U.S. government continues to spend like crazy and accumulate more debt, it is not our unborn grandchildren that we should worry about most.  It is the people suffering right here and right now from a massive overdose of big government.  If the government drastically cuts spending as it did after World War II, then we will see a big improvement in living standards in a short period of time.

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