Monday, April 18, 2005

Why I don't care about the deficit.

Jane Galt wonders why no one cares much about deficits. Because deficits matter less than taxes

People have an archaic conception that deficits are a failure to raise enough money from taxes. There is a demand for treasury bonds, and selling them is a perfectly legitimate means of raising money for the government. Deficits are perfectly progressive. Bonds are voluntarily sold on the open market where the people who buy them are the people who can most afford them. Bonds harm the economy because extra money must be spent on interest. Taxes are involuntary, and harm the economy because deadweight loss and disincentives reduce growth. The question is do deficits matter more or less than taxes at current levels?

In theory, to maximize the net benefit of government, the budget should be balanced so that the marginal harm of deficits equals the marginal harm of taxes equals the marginal benefit of spending. The political equilibrium is probably quite different from the economic equilibrium.

It is a complete mystery to me why libertarians insist that all funds be raised involuntarily, by a balanced budget, rather than voluntarily by selling bonds.

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