The Pain of Public Debt

One of the big arguments against government borrowing comes from James Buchanan, winner of the Nobel Prize in economics in 1986. In his book Public Principles of Public Debt, he argued against government borrowing because he claimed that the public enjoy the benefits of public expenditures while the debts incurred pass along to future generations for settlement. Buchanan surmised that if residents endure no consequences for funds borrowed and spent, little constraint exists to dampen the fiery spending aspirations of government bureaucrats and leaders. It would not be very different from a person indulging every consumptive whim while handing the bill to distant progeny.

Are there no simultaneously deleterious consequences for indulging unrestrained squander by government? And if not, why has the absence of such pain not liberated government from all limitations against spending as freely and recklessly as it pleases?

When government undertakes a public expenditure, taxes are imposed upon the populace. Those taxed feel the taxes' deleterious and stifling effects. Money is collected, in uneven fashion due to disparities in incomes, asset and property holdings, and consumption, from a multitude of fines or penalties imposed upon the residents of a community. Some shall pay more than the average, others less. Some bear a heavy burden, and others none at all. But the individual contributions do sire a collective pain that serves to limit public spending.

If public expenditures yield a return, though distributed unevenly, it is compensation for the pain inflicted. If no return, then all suffer a double-pain: one from taxation and one from the failed expenditure, some suffering more than others.

Here is my take from December of last year:

It does not make sense to take the job of capital allocation away from people who have demonstrated great skill in capital allocation, and give it to an entity that has demonstrated very poor skill in capital allocation, which is the government

Economist described this as "opportunity cost" that occurs when capital is misallocated. Government officials, whether elected or appointed, are not in the business of allocating capital to increase return but to increase vote tallies or turf.

Beware the politician that wants to make "investments" and the regulator who wants to enforce "protection."

Unfortunately, the opportunity cost is not apparent to voters or even to consumers. The cost is concealed from view. Especially is that true in a situation in which the government costs the economy opportunity while the government has perceived infinite capacity to borrow. The cost remains but the impact is postponed.

We are rapidly coming to a point at which the government's infinite capacity to borrow will be severely constricted because the perception is rapidly vanishing. Then the opportunity costs will present their bill and the pain will be severe.

The Invisible Hand did not go away.

They can’t raise interest rates, govt is biggest debtor.

I worked with bankrupt business many years ago. Everything was fine right up to the day the bank wouldn’t lend them anymore money.

I visited Mongolia a few years after the demise of the Soviet Union. Visited one of their state run farms. This place was stripped. I imagined the process. Upper mgt got the news, grabbed the cash, and liquid assets. Middle mgt grabbed the tractors and inventory. Workers grabbed the tools and anything else they could carry.

I look all around the stripped facility and finally looked down. The manure chain was still full. No one had run the manure chain for the final time. IT HAPPENED FAST.

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