Defending the Judeo-Christian Ethic, Limited Government, & the American Constitution
Sunday December 14th 2014

The Debt Sky

Free Enterprise Zone, The Freeman, Sheldon Richman

Since the sky is now apparently the limit, I rechristen the debt ceiling “the debt sky.” But seriously — no, that was serious.

The Washington Times reported Wednesday:

U.S. debt shot up $239 billion on Tuesday — the largest one-day bump in history — as the government flexed the new borrowing room it earned in this week’s debt-limit increase deal.

The debt subject to the statutory limit shot way past the old cap of $14.294 trillion to hit $14.532 trillion on Tuesday, according to the latest the Treasury Department figures, which are released on the next business day.

That increase puts the government already remarkably close to the new debt limit of $14.694, which means one day’s new borrowing ate up 60 percent of the $400 billion in space Congress granted the president this week.

That didn’t take long. Clearly normalcy has returned. But sighs of relief seem inappropriate.

Weathering the “Cuts”

The day after The Deal was signed, lifting the debt limit and “averting default,” America awoke to CNN reporter Richard Quest’s Keynesian lament that “the economy won’t weather the cuts.” Cuts? He apparently meant the small reductions over ten years in the rate of spending growth. That’s Washingtonese for “cuts.” What Murray Rothbard called a “cut-cut,” where the amount spent actually falls from the present level, long ago passed from consideration. In our world there are only two varieties of “cuts,” both of which are in The Deal: “real cuts” (reducing in the rate of growth) and “phony cuts” (canceling an authorization for spending that no one expected to occur anyway). If you didn’t get that, it will all be in the next edition of the Newspeak dictionary.

Even if we accept the Keynesian framework for the sake of argument, we might wonder about an economy that is so fragile it won’t survive modest reductions in the rate of increase in government spending. Even the New York Times sees what’s going on:

There is something you should know about the deal to cut federal spending that President Obama signed into law on Tuesday: It does not actually reduce federal spending.

By the end of the 10-year deal, the federal debt would be much larger than it is today.

Indeed, both the government and its debts will continue to grow faster than the American economy, primarily because the new law does not address federal spending on health care.

One gets the feeling that the frantic opposition to the mere slowing of the growth rate is motivated less by concerns about the economy than by concerns that the people may be catching on that government spending is the problem not the solution. After all, besides 9.2 percent unemployment and almost no economic growth, what exactly is there to show for a trillion dollars in “stimulus” spending?

Government as Consumer

Anxiety over cuts (either cut-cuts or cuts in the growth rate), if that anxiety is indeed sincere, is unnecessary. We need not wonder what would happen if government spending were reduced because we already know. To the extent government abstains from spending, the resources it would have consumed will be available for private production. (Let’s throw in the repeal of all privileges too.) Government is a consumer of scarce resources. The promise of government investment is debunked when we understand that real market investment is a price-guided entrepreneurial commitment of resources driven by hunches about what consumers will want in the future. Assuming a freed market, whether a particular use of resources best serves consumers is eventually revealed in the profit-and-loss statement.

Although advocates of government projects try to appropriate the aura of market investment, their schemes can’t escape being acts of consumption. They are guided not by market prices and expected consumer preferences but by politicians’ wish to be reelected. The funds won’t be acquired by consent and therefore put to a market test, and the services won’t be offered on the market to free consumers with the power to say no thank you. Rather, resources will be acquired either by taxation, that is, by the threat of force, or by borrowing, which is possible only because the government has power to tax. Any resulting services will be provided not on the market but through the political process in which some are compelled to subsidize others. Costs are severed from benefits.

Value Lost

Thus we have no reason to think that government transforms resources from less-valued to more-valued forms as freed markets tend to happen to do.

Those who fear for the economy if the government fails to spend ever more money should review the near-laboratory test of their belief that took place at the end of World War II in 1945. At that time the Keynesians despaired that if government spending (and hence aggregate demand) dropped sharply after the war and government employment declined with the discharge of 10 million draftees, the economy would fall “back” into depression, complete with the high unemployment seen in the 1930s. Yet this did not happen.

Robert Higgs writes,

The unemployment rate in 1947, when the transition was nearly complete, was less than 4 percent.… The year 1946, when civilian output increased by about 30 percent, was the most glorious single year in the entire history of the U.S. economy. By 1948, real output was back on its long-run growth trend.

As Higgs documents, the war did not end the Depression, unless you count consumer deprivation and eliminating unemployment through military conscription as signs of prosperity. It was the government’s retrenchment after the war that did the trick.

The lesson then is that real and dramatic spending cuts through a radical reduction in what government does is the authentic way to stimulate economic growth, not to mention expand individual freedom.

Sheldon Richman is the editor of The Freeman and TheFreemanOnline.org, and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America’s Families.

Copyright © 2011 Foundation for Economic Education. Used with permission.