Government borrowing confuses people. It shouldn’t. The matter is very simple. When understood, borrowing is not in essence any different from taxes in 3 ways. Government has no right to impose taxes, and it similarly has no right to borrow. Both are sources of government spending (often termed benefits). Typically, borrowing cannot be done unless government taxes.
For example, the government taxes $100, borrows $10, and then spends $110 ($95 on programs and $15 paid to government employees). Like any borrower, the government cannot borrow unless it makes a credible promise to repay the debt. The government’s promise is based mainly on its capacity to tax in the future. (It may have some assets that it can sell or pledge but that’s not the usual method of issuing or paying off government debt.)
Digression: The government need not ever pay off the principal as long as it can pay perpetual interest or lenders think it can pay the interest. A government can issue perpetual bonds.
Clearly, new borrowing increases the amount that government spends now and increases the present value of the future taxes by exactly the same amount as the new current borrowing. If the government borrows a new $10, it becomes obliged to pay that $10 back. The present value of that promise is $10, at whatever the interest rate is.
Comments: It isn’t bad enough that government taxes its current tax-serfs, but it also creates obligations for the taxation of future generations of tax-serfs. Lenders to government are helping to augment the spending, which, as argued in my prior blog, has no basis in rights. The higher the new debt and spending, the greater must be the taxation of future tax-serfs if default is to be avoided.
If the rate of issuing new debt rises faster than the ability of the government to extract taxes to service the debt, the likelihood of default rises. I am thinking in real terms. In nominal terms, the government can issue bonds to its central bank and never default. Default (in real terms) can take varied forms, ranging from partial payment, deferred payment, no payment to payment in depreciated currency. This discussion enumerates the main possibilities, but the reality is that default in the traditional nominal sense won’t occur, unless Congress blunders. What becomes increasingly likely is payment in depreciated currency. As the rate of issuance of new debt increases, the likelihood of future tax increases also increases.
If, as I have argued, there is no reasonable argument to support the right of a government to tax, then the same applies to government borrowing, since it is based upon taxation. Borrowing amounts to deferred taxation.
The evil of government borrowing does indeed augment the evil of government, but in essence or for simplicity it can be thought of as the same as the evil of taxation, in that both are contra the rights of the tax-serfs and both involve draining resources from those tax-serfs. To be against taxation is also to be against government borrowing, and to be against government borrowing is to be against taxation.
9:37 am on November 22, 2013
