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Government Spending

Posted 8/6/2019

All levels of government (especially state and federal) are Interventionists, each operates with a mixture of capitalism and socialism. Because each operates partially under socialism, it suffers from the defects of socialism. Our governments should not be Santa Claus. The profit-and-loss test, should govern where your hard-earned tax dollars are spent.

Because each level of government operates outside the free market, it cannot rely on objective feedback from the free market. A government’s budget provides a limit to how many resources it siphons out of the private sector. Our governments must purchase resources with free market prices attached to such resources — yet our government still does not have an objective measure of how much its citizens benefit from these expenditures. Without such feedback, even IF the government endeavours to help the people, they “fly blind” because of any lack of proper feedback.


Is it better to spend money on the Canadian Museum for Human Rights or spend the money on flu shots or transportation hubs?  Why do we route our ‘charitable donations’ and/or needs of civic development to be funded through government?  I would rather donate to an effective corporation, to build a bridge or pave the streets, then have it misspent by government bureaucracy. If you earn the money, you have a right to spend your money. Your earnings should not be wasted on shopping carts for the homeless or for the separatists in Quebec, or for the United Nations.


Government raises money by three ways: taxation (theft from you and your children); budget deficits (borrowing from others, most likely outside our country and to be repaid from you and your children); inflation (creating money out of thin air).


Deficit spending, can only be repaid back by raising taxes, borrowing money (which must be repaid), and by printing money. None of those three repayment methods benefit Canadians or Americans like you or your children. I argue strongly we must reduce government spending. I argue weakly but suggest there should always be surpluses, so that in the lean years, we have the cash to utilize. I argue strongly, budgets must be balanced.


Government deficits make the country poorer for two reasons:[1] 

Government borrowing crowds out private investment. In effect, government competes with other potential borrowers for the scarce funds available and thereby raising interest rates. At the higher interest rate, entrepreneurs invest fewer resources into making new factories, buying more equipment, etc. The very plausible assumption is that government will not use the borrowed money as productively as private borrowers would have, it means that future generations inherit an economy with fewer factories, less equipment, and so on.


Another way government debt makes future generations poorer is through the harmful incentive effects of future taxes needed to service the debt. For example, if government runs a deficit today, and needs to pay back $100 billion to creditors in 30 years, that does make the country poorer  at present and in the future. But the problem is not the $100 billion payment per se—that comes out of the pockets of taxpayers and goes into the pockets of the people who inherited the government bonds. Rather, the problem is in order to raise the $100 billion, the government would probably raise taxes (rather than cut spending), and this action causes dislocations to the economy over and above the simple extraction of revenue.


Another danger of government deficits is it allows government into spending more than it otherwise would if it were forced to always run a balanced budget. All government spending diverts money away from entrepreneurs and others in the private sector and directs them to government picked winners and losers.


Government intervention creates more cyclical boom and bust cycles than would occur naturally with a free market society. The illusion of prosperity created by the government will not last forever. This illusion breaks when government forces down interest rates from their proper free market levels.[2]  What makes it worse are the government programs initiated to fix the problem.


In a free market, some sectors of the economy may be cyclical as resources are redeployed to other rising sectors. Government intervention prevents redeployment of capital. The growth in every sector creates a shortage of labour, escalating wages. It is physically impossible to produce more consumer goods with less labour from fewer resources. In a free market driven economy, consumers would need to cut back on certain goods to redeploy the capital, resources and labour.  These false booms can sometimes take years to rear its ugly head. When they do collapse, many are caught unaware. Businesses may have implemented long term planned expansions, and significant capital and labour which now are forced to be put on hold. Now, many workers discover they can’t earn the same pay cheques they became accustomed to.


Thanks to Robert P Murphy and his publication of “Lessons For The Young Economist” for articulating sound thought.


[1]              The Young Economist, by Robert Murphy, page 354

[2]              The Young Economist, by Robert Murphy, page 363

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