Dan Mitchell: Deficits are Bad, but the Real Problem is Spending

Jonathan Finegold Catalán — Tue, 12 Jan 2010 08:05:35 +0000

Daniel Mitchell, from the Cato Institute, offers this new educational video on government deficits and spending. I had the pleasure of listening to Dan Mitchell speak at Cato University 2009, focusing on the existence and justification of tax havens, and the damaging effects of government taxes on entrepreneurship, investment and economic growth. In this new video, he provides us with a valuable and all-important lesson:

www.youtube.com/watch?v=n9kEmZB5luM

The only disagreement I have is with one of the introductory statements. The video makes a distinction between spending which funds long-term benefits (i.e. investment) and spending which is wasteful and only brings about short-term satisfaction (i.e. consumption), and applies it to government spending. It later provides an analogy by applying these two distinctions to household deficit; borrowing for a business which will generate revenue over the long-term, and therefore make the interest rate (price of borrowed capital) bearable, compared to borrowing for consumption spending, which will not lead to long-term revenue, and will make paying the interest less bearable (or unbearable). I think that Dan Mitchell would agree that government generally does a poor job in investing and therefore all government expenditure can usually be lumped under consumption.

My disagreement specifically deals with the lesson’s caveat that government spending is OK while it brings about long-term benefits. There is no clear distinction on what type of government spending is justified, and so by adding the aforementioned caveat it seems to open the door to a wide possibility of justifications for different government programs which are definitely not beneficial over the long-term (such as, let us say, social security). While I think that the distinction should have been made clearer (with less room for interpretation), as I said before the video was made for a mainstream crowd.

My disagreement is an unfair distraction. The point of the video is: while government deficits and temporary government spending can be dealt with if productivity increases to such a degree to which it makes paying the interest on the debt bearable, this relationship fails to hold true if government spending continues indefinitely and productivity falls. So, while paying for the Second World War caused no major harm to the American economy, because high spending ceased after the war, today we are burdened with ever increasing government spending which shows no signs of receding. This is due to the unfunded liabilities created through government welfare programs. Indefinite spending will have to be paid for by higher taxes, which will take a toll on productivity.

When it comes to the actual argument of the lesson, Daniel Mitchell (as usual) hits the nail right on the head. The key is reducing government spending to a bare minimum. Realistically, in today’s world, this means reducing government spending to that which covers only “bare essentials” (such as security). Ideally, this means abolishing government spending altogether.

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