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Debts, Deficits, and Spending Cuts

Dr. Jeffrey Miron at Harvard explains America’s debt situation, which is projected to worsen in the coming years. In his estimation, an increase in taxes will only make the situation worse, as it will reduce productivity. Therefore, government spending must be cut. If not, America will be bankrupt and default on its debt.

Debts, Deficits, and Spending Cuts

“It’s the expenditure, stupid,” should be the line, not, “it’s the deficits, stupid.”

My name is Jeff Miron. I’m director of Undergraduate Studies in the Department of Economics at Harvard University. I want to talk about deficits, debt, and the U.S. fiscal situation.

First, what is the deficit? It’s the difference between how much we spend and how much we take in in tax revenue. Our debt is how much we accumulate over time from running deficits year after year. It’s basically the sum of our past deficits. The U.S. situation is such that we’re running huge deficits. We’re projected to run huge deficits, and therefore our debt is exploding and is going to eventually crash over time. And we’ll end up being bankrupt and having to default on all that debt. And what should we do about this? Lots of people say, “Well, we should raise some taxes and cut some spending.” There are two problems with that.

First of all, raising taxes slows the economy down. That means less tax revenue, and that makes the problem even worse, because we are not going to be as vibrant an economy and so our deficits will tend to be even bigger despite having raised taxes because of the slower economic growth.

Second, that approach forgets the fact that most of the expenditures, huge amounts, are a terrible idea to begin with. We don’t want most of that expenditure. It’s all been put there by special interest groups. So even if we had a huge surplus, we should still be cutting an enormous fraction of federal expenditure. And that’s the huge problem. “It’s the expenditure, stupid,” should be the line, not, “it’s the deficit, stupid.”

Why is spending bad in and of itself? It’s bad because, first of all, that spending is money that could have been in the private sector. It’s spending that could have been done by a private business or an individual on something that they thought was productive or useful or valuable. So, we’re making decisions about that spending in Washington instead of out there in the country by individuals.

In addition, that spending is distorting all of the ways that resources are allocated by spending money to subsidize health insurance, we’re encouraging people to buy too much health care. That’s really bad for the efficiency of the health care system. By spending money trying to enforce drug prohibition, we’re creating crime and corruption. That’s really bad for the economy. And the list goes on and on. With few exceptions, such as, say, some of National Defense, spending causes tons of problems because it interferes in the workings of private markets.

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