RUSS ROBERTS

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Deficits Don’t Mean Disaster

(from USA Today)

Is $422 billion a lot of money?

It is if we’re talking about my mortgage. But for a U.S. economy of nearly $12 trillion, it’s not particularly large.

The current deficit is smaller as a percentage of gross domestic product than it was in much of the 1980s and 1990s, those decades when the gloom-and-doomers told us that deficits would destroy our economy and our standard of living. Instead, the economy thrived, we added millions of jobs, and our standard of living rose.

The sky didn’t fall then, and it won’t fall now. But isn’t it irresponsible for us to live beyond our means? Don’t we punish our children if we borrow money today that they must pay back tomorrow?

It can be prudent to live beyond your means. You and I do it all of the time when we borrow money to buy a house. True, the mortgage payments may end up burdening our children. But paying cash is also costly. Imagine a would-be homeowner, allergic to debt, who insists on paying cash. That, too, means less money for the health and education of his children while he builds up his nest egg to buy the house.

A well-built house financed by a mortgage is an asset to your children. An extravagant lemon financed by cash punishes them. It’s the size and quality of the house that matter — not how it’s financed.

So it is with government spending. Funding for crucial infrastructure that is financed by debt is money well spent. Government subsidies to farmers are wasteful even when they’re financed out of current taxes.

Both President Bush and Democratic presidential nominee John Kerry promise to spend more money. That money will come out of our pockets either today or tomorrow in the form of higher taxes. The timing of those taxes is less important than whether the extra spending yields benefits we could not achieve acting as individuals.

Harmful and unnecessary government spending burdens us and our children far more than the deficit.

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