Citizens of democratic countries around the world, from Greece to the US to Japan, are awakening to the fact that governments have mortgaged off their futures. This is the result of an experiment with democracy whereby political elites and their bureaucratic minions acquired increasingly-unlimited powers while being largely unaccountable for the outcomes of their misdeeds and missteps.
As they are, incentives associated with representative democracy encourage profligate politicians to ignore or skirt constitutional restraints to expand the scope of government. Added to the inducements for growth of the state driven by special interest groups that promise political payoffs is cheerleading from Keynesian economists and spendthrift bureaucrats.
An ever-widening range of policies and spending commitments are offered to attract electoral support. With such promises growing faster than the ability of current wealth creators in the private sector to contribute to the pool of tax revenues to pay for them, public-sector deficits keep rising.
After hard lessons that monetary expansions to pay for excessive spending lead to crippling rises in price levels, democratic governments increasingly turned to debt issuance to fund deficits. Deficits financed by expanded bank credit create permanent and rising price levels that lead to cycles of artificial booms and “bubbles” followed inevitably by painful economic busts.
The only alternative to fund those deficits is to issue ever-rising public-sector debts. As such, politicians have created a “welfare state trap” by making ever-expanding promises to citizens that develop an insatiable demand for entitlements. But attempts to appease these populist demands fall on a private sector that is increasingly enfeebled by higher burdens of regulations and taxes.
While the private sector exists as a means for wealth creation, governments operate as a means to redistribute wealth and income. Increasing the size and role of government diverts more workers and resources from wealth-creating activities towards activities that are inefficient and less productive.
For example, public-sector employees paid from the pool of tax revenues through (forced) contributions from the private sector are living off surpluses created by others. As such, public-sector employees do not directly add to wealth creation and are not taxpayers in the most meaningful sense.
Formation of public debt is very different from the creation of private debt that leads to different expectation and incentives for both creditors and debtors.
For its part, private debt involves a voluntary transaction whereby creditors exchange funds for an IOU from a debtor. Since private debtors pledge property or stake their reputations as a basis for repayments, they and creditors face incentives to limit debt creation that encourage prudent behavior by both parties.
By contrast, public-sector debts are created by the ruling elite to bind citizens involuntarily to contracts enforced using coercive claims against the future income of citizens. Since public officials spend someone else’s money that promotes their own careers but are not personally liable for its repayment, they face weak incentives to restrain debt creation. And creditors understand that repayment is not made by politicians or bureaucrats but by taxpayers that pony up under threat of the coercive powers possessed by the state.
Since public credit transactions lead to the involuntary use of someone else’s property and income based on implied coercion, they violate the property rights of citizens in the future. As such, public-sector debt contracts should be seen as immoral acts that should be denounced.
Those that are not convinced by the “immorality” of deficit spending that leads to growing public-sector debt might consider economic arguments against it.
It is often claimed that increased government spending is justified in that constitutes an investment. But a large proportion of government spending involves transfer payments to support careers of bureaucrats and politicians or consumption of their dependent clients.
Another problem with deficits and public-sector debt involves higher future tax burdens is that they divert resources from the productive private sector to the less-efficient public sector. Profit-seeking corporations offer incentives that reward their employees for being efficient & innovative. Employees & managers in the private sector received rewards in the form of pay hikes, bonuses or promotions for taking initiatives & being innovative reduce costs or increase sales.
While bureaucrats face legislative encumbrances & political interferences, they also face disincentives to be efficient or innovative. Individual bureaucrats do not capture rewards if they boost efficiency or take initiatives to innovate & agencies that cut costs tend to find their budgets cut.
On balance, diverting more resources to governments leads to net losses in productivity & the potential for economic growth. Eventually, a tipping point occurs when public-sector claims on resources inhibits the ability of the private sector to create jobs & increase income.
Greed, graft & inefficiency; courtesy of your favorite public-sector official: