We all know government debt is bad for the young. But it’s also bad for the poor.

Hurting the Kids to Help the Elderly

The well-known political philosopher Loren Lomasky recently reminded us of why debt is bad for the young. We might be able to justify spending now, and borrowing to finance the spending, if we were primarily building roads and creating infrastructure (even then it would be debatable, of course).

But that’s not what we’re doing. We are using debt to pay for old folks (yes, like me! Thanks, kids!) to live by the inflated standard we imagined we deserved.

Public employee pensions, Social Security, bailouts of stocks to ensure higher prices for our 401k’s…the list is long. The strange thing about this, as Lomasky notes, is that old people had long lives, working in pretty favorable work environments, when we could have put money away for retirement.  Most of us Boomers failed at that. Now, we expect young people, facing much more problematic Obama-era job situations, to pay back not only their own student loan debts but also our unfunded old age pensions!

You kids work. I’m going golfing, and then to a show. Don’t wait up; you have to be at your jobs early tomorrow. Someone has to pay for my lack of planning, and my generation votes a lot more than yours does!

Hurting the Kids to Help the Poor

Okay, fair enough. Using government debt to fund current spending is really unfair for the next generation.

But there still might be good “social justice” reasons to use deficit spending, right? We want to help the poor. So maybe it’s worth the investment: if we borrow money and give it to the poor, at least it’s going to a good cause. Aren’t we? Isn’t it?

Not so much. There are two problems.

Problem 1: The Strong Get More Than The Weak. Always.

First, the government budget—if it is not restricted to tax revenue but can be expanded by deficits—is a kind of “commons.”

Garrett Hardin famously wrote about the “tragedy of the commons:” a collectively owned good that everyone tries to take too much of.

It’s the same problem as overfishing cod or tuna in the open ocean, or too many livestock overgrazing common land: Since each can take as much as he or she wants, we all take too much.

What people don’t recognize about the deficit commons is this: the rules for getting a piece of the deficits are not fair: the politically powerful will always be able to take more.

Frederic Bastiat saw the problem clearly, in his essay on “Justice and Fraternity:” When under the pretext of fraternity, the legal code imposes mutual sacrifices on the citizens, human nature is not thereby abrogated. Everyone will then direct his efforts toward contributing little to, and taking much from, the common fund of sacrifices.

Now, is it the most unfortunate who gains from this struggle? Certainly not. Rather, the most influential and calculating get the best deals.

That means that the poor will always lose to political interests.

If you think that putting more money in the budget is going to help the poor, you are deluded. Money in the budget always goes to the politically powerful, even if the rhetoric justifying the spending is “the pretext of fraternity.” Some very important work in the Public Choice school has been done on this question, especially by Richard Wagner, following up on his landmark book with James Buchanan, Democracy in Deficit (1977).

Problem 2: Deficits Steal from the Poor and Gives to the Rich

The second problem with deficits, in terms of benefiting the poor, is more subtle. But it’s no less important. There is a big debate about whether deficits are “stealing from our children,” but not many people have asked whether deficits are stealing from the poor.

How could deficits be stealing from the poor?

The answer comes down to the implications of how government spending is financed, so let’s take a step back to look at that first.  There are two main ways to finance government spending:

  1. Taxes. Ignoring payroll taxes, which fund health insurance and old-age pensions, our government taxes higher incomes at a higher percentage (This is especially true of the federal government). This means that wealthy people pay for government spending if it is financed through taxes. Now, this may be a bad thing, to the extent that government spending is not very productive and the incentives of high taxes may be perverse, harming growth and innovation. But if you care about “social justice,” you want government spending to be financed by taxes.
  1. Debt. If government spending is financed by debt, then people buy Treasury bonds, hold the bonds to maturity, and then get back the money they loaned to the government, plus interest. Here again, as with taxes, most of the money is going to come from the wealthy, because they are the ones who have enough money to buy Treasury bonds.

So it all works out, right? Either way, the wealthy pay for government spending, regardless of whether the spending is financed by taxes or borrowing.

Not exactly.

Problem 2, Explained.

In the case of taxes, the money is taken and then spent. It’s gone. In the case of borrowing, the government takes the money of the wealthy, uses it for a while, and then gives it back, plus interest! That money has to come from somewhere, and usually it comes straight out of the economy, crippling the very people the government was trying to help and contributing to income inequality.

In other words, the wealthy actually benefit directly from deficits, and lose with taxes (and, one could argue, the poor lose out with both).

I don’t agree with Thomas Piketty very often, but you have to give him credit in this case. He stated the problem succinctly in his book, Capital in the Twenty-First Century:

There are two main ways for a government to finance its expenses: taxes and debt. In general, taxation is by far preferable to debt in terms of justice and efficiency. The problem with debt is that it usually has to be repaid, so that debt financing is in the interest of those who have the means to lend to the government. From the standpoint of the general interest, it is normally preferable to tax the wealthy rather than borrow from them.

And that’s pretty much your complete answer, right there. Deficits harm, rather than help, the poor. To summarize:

  • First, if you think that deficit spending will be used to benefit the poor, remember that the budget is a competitive “commons,” and government benefits will always go to the politically powerful, not to the folks who need it. So deficit spending helps powerful political interests, not the poor.
  • Second, if you think that the way the spending is financed, using debt (and that’s the definition of “deficit spending”), then that’s wrong, too. Running deficits financed by bonds sold to the wealthy actually increases the concentration of wealth, contributing to inequality. That’s not the fault of the wealthy, though; that’s the fault of the government because it chose to run big deficits.

Deficits ultimately end up hurting the poor.  And if you care about social justice, you will oppose deficit spending.