The Ethics of Deficits

I like to think that I've made a somewhat serious effort over the years to understand the impact of budget deficits on economic growth and I must admit that I'm stymied. Both the centrist and populist factions have reasonable-sounding arguments on the table, and it seems to turn on things that are beyond my technical capabilities. The fact that the great bulk of professional economists seem to me to be on the centrist side carries some weight, but it's far from decisive and there are ample credentialed economists on the populist side as well.

I am, however, a moderately trained moral philosopher and can tell you that the objection that deficits "place an unfair financial burden on future generations" doesn't make a ton of sense. Think about an individual taking out a large loan for some reason or other -- a mortgage to buy a house, say. This may be a prudent investment, or it may be a foolish one. Whether or not the loan amounts to an "unfair financial burden" on future versions of yourself isn't an additional issue on top of the issue of how well your investment performs.

It's similar with deficits. If moderate levels of deficit spending allow us to finance growth-enhancing public sector investments, then there's no burden at all being placed on future generations. Conversely, if moderate levels of deficit spending are "crowding out" enough private investment to counteract the beneficial impact of additional public spending then this is a sufficient reason not to do it all on its own. People like to think there's an independent, ethical issue here because since it wouldn't hinge on technical macroeconomic issues you can deploy the ethical issue in the form of effective political rhetoric or punditry aimed at a broad audience, but the technical question really does need to be answered. If Cheney was right and deficits don't matter for growth, then they also don't matter as a question of political morality.

Comments

Isn't the 'unfair burden' argument a moral hazard argument -- that borrowers will overestimate the likelihood that their investments will be profitable if they know that someone else will have to repay the debts incurred to make the investments? It's not so much an argument that deficit spending is always wrong, as that pushing the need to pay for current consumption onto future generations is always going to be a temptation that should be guarded against.

Posted by LizardBreath | May 3, 2007 11:49 AM

The problem with this reasoning is that, while it's sensible for people to take out loans for major investments which temporarilly exceed their income, it is NOT sensible for people to take out loans, month in, month out, for their day to day expenses. And that's what the federal deficit represents. Not "load leveling", but simply an effort to live beyond the government's means, because spending reaps political benefits, and taxing doesn't.

Posted by Brett Bellmore | May 3, 2007 11:56 AM

I had a very long version of the same point LB was making, but my F5 key saved you all. She wins anyway for succinctness.

Posted by jhupp | May 3, 2007 12:02 PM

As a student in economics I can tell you that most of the reason for confusion on deficits are entirely due to people trying to muddy the waters. Really deficits are not that hard, and you've hit on most of the answer when you think of a deficit like a loan. If you are investing the money in ways that will improve future growth, then it's a good thing. If you spend the money on a war that produces no benefit then it's wasted.
Really simple macroeconomics says that in times of recession, tax receipts drop and expenditures (like welfare, etc) increase, meaning a deficit. In times of prosperity, tax receipts increase and expenditures drop, meaning a budget surplus. Thus deficits are only a problem if you have them in times of prosperity, because you should be saving and paying down the debt. Or put another way, if you can't afford your outlays when you are making more money, then your books are not in order.

Posted by Tim | May 3, 2007 12:04 PM

Wow Matt,

I've been reading you for a while and I am surprised that you would frame the morality question in the way you have.

Lets try this: What if I borrowed a huge amount of money and lost it all on a gamble. I secured the loan by promising all the income earned by not only my own children but also the children of the neighbors on either side of me until the loan was paid. Whether or not that left them with enough money for luxuries, or even necessities would not excuse them from their obligation to repay my debt.

I don't know where you get the "future versions" view of autonomous persons in the next generations. Certainly I would argue that they have the right to make their own decisions about how to spend their tax money (labor). By forcing them to work off OUR debts we are, in a sense, subjecting them to a governmentally coerced version of slavery through taxation without representation.

Posted by Craig U. | May 3, 2007 12:04 PM

Deficits for capital investment--good (assuming they are wise investments); deficits to prop up consumption (at least when not at the bottom of a cyclical recession and decrease in revenue)--bad. It doesn't get a lot more complicated than that, as far as I can tell.

A corollary: The "burdening the next generation" argument seems melodramatic--not least because if we're pursuing unwise deficit spending, it ain't gonna take 30 years for that chicken to come home to roost; whereas if it does take that long, a lot of other bad policy will also have to accrue down the road to make today's foolishness part of a larger relevant whole of self-destructive fiscal policy.

Another corollary: running larger deficits than necessary in order to leave more income on the table for a burgeoning rentier/hereditary superrich class, reinforcing and exacerbating a preexisting and invidious economic phenomenon is fucking nuts.

Posted by elle loco | May 3, 2007 12:07 PM

I think Matthew is begging the question (and please, no discussion about the use of the phrase). He says that an investment like a house "may be a prudent investment, or it may be a foolish one" but that the intergenerational issues are not "additional" issues here. I don't know what Matthew means by "additional". The intergenerational issues are part and parcel of the whole "is it prudent or is it foolish" question! If I buy a house, part of the determination about whether it is prudent is whether my children can benefit from it.

This is the same as the intergenerational issued in the global warming debate. Economic growth now may or may not be a good thing, given some amount of global warming resulting from that growth, depending on how much we value the harm done to future generations. We've gone through the whole debate about the approrpiate discount rate to use for future generations. Same applies to deficit spending, I'd think.

Posted by Al | May 3, 2007 12:09 PM

Isn't relevant to consider the distinction between capital expenditures - expenditures on things that have a long-term, useful life (e.g., roads, bridges, tunnels, buildings, etc.) and other expenditures? Assuming that you can accurately define them, "capital" expenditures should not be treated as one-time expenses; instead, their cost should spread over time. If the United States accounted for "capital" expenditures in a "capital budget," the nominal deficit would decline. At the same time, the lower (corrected?) deficit number we would give us a more accurate idea of how much money we are borrowing to finance current consumption.

Posted by k | May 3, 2007 12:10 PM

Taking out a huge loan to buy a long-lived, productive asset like a house or a factory or a college education is good; taking loans out consistently to pay your grocery and electric bills bills is bad. Can we get a straight answer on how much government spending is of one type (roads, bridges, education) and how much is of the other? Then if we depreciate the expenditures for the former over a suitable period of time, what is the real deficit?

Posted by CJColucci | May 3, 2007 12:10 PM

I'd like to actually have a moderate deficit before I start debating whether moderate deficits are a good thing.

The point here is very simple - you should always be willing to borrow money at 5% interest if you can turn around and invest it for a 10% return. However, when we're talking about the government rather than an individual borrower, there are a couple complications.

1) The government is the one that needs to balance the books. So even if you can borrow money at 5% to grow the economy by 10%, you can't pay off those loans unless the government grows its own revenues by 10% (or at least by more than 5%). If the way you grow the economy is through a constant series of tax cuts that depress government revenue, the debt will never get paid off - because the moment the government tries to increase taxes to restore its revenues, suddenly the economy takes a hit.

2) No one can reliably estimate the economy's future rate of growth. The bigger a deficit you run, the bigger a bet you're placing that growth will outstrip the interest you're paying. And it's that uncertainty, along with the debt, that we leave to our grandchildren.

Posted by Steve | May 3, 2007 12:11 PM

I'd like to actually have a moderate deficit

We have a moderate deficit now - less than the post-war mean, I think. What makes you think we don't?

Posted by Al | May 3, 2007 12:13 PM

I'm no economist, but on the moral question: the government raises money by 1/ taxes, and 2/ borrowing. Paying taxes is compulsory and you don't get the money back. Lending is voluntary, due for eventual repayment, and compensated by interest payments in the interim. We all pay taxes, but only those with discretionary investment money can lend to the government. It follows as the night the day, that when the national debt is pooh-poohed because "we owe it to ourselves," the "we" who owe are the taxpayers, the "us" to whom it is owed are the bondholders. The former are not so simply the poor, nor the latter so simply the rich, and it's of course the case that many a social investment *wd* benefit the taxpayers sufficiently to make the cost worth paying. But that confidence has been visibly fraying for years--ironic that it's the right that has managed to capitalize on it politically.

Posted by helmling | May 3, 2007 12:20 PM

A mortgage is not a deficit, it is a debt.

Posted by JP | May 3, 2007 12:21 PM

Somehow, whenever I hear the term "political morality" I have a strong urge to reach down and make sure my wallet is still there.

Posted by justawriter | May 3, 2007 12:47 PM

Al, we don't have a moderate deficit, not even close. You need to look at deficits in the context of the total debt accumulated, the point in the business cycle we are at, and upcoming government spending obligations. A deficit is a flow amount borrowed for the current period, and it makes no sense to look at this in isolation from the larger question of debt relative to obligations. The giant debt blowout of the past seven years, combined with the upcoming retirement of the baby boomers, and the fact that we are late into a recovery where we ideally should have been retiring debt, makes our situation bad.

Posted by mq | May 3, 2007 12:49 PM

Another reason to dislike deficits is they allow politicians to do irresponsible but politically advantageous things such as eliminate the estate tax or occupy a Middle Eastern country with no accountability. If Bush had had to raise other taxes or make huge spending cuts to support his tax cuts and Iraq policy, we would have gotten rid of him 3 years ago.

Posted by Ron | May 3, 2007 12:53 PM

on what "investments" is the government reaping returns greater than the cost of the debt? virtually all entitlement spending - the lion share of the deficit creation problem - props up consumption.

sometimes spending is needed to avoid larger losses to the economy. for example - if trucks cannot travel the highways because they are crumbling - we will have economic hardship far greater than the cost of borrowing to finance road project. but much of our entitlement spending as well as our discretionary budget does not pass this test.

Posted by john | May 3, 2007 1:01 PM

mq,

Matthew tells me there is no upcoming crisis with regard to upcoming government spending obligations (what ever happened to Matthew's "There Is No Crisis" sidebar item? Did he remove that a long time ago or did it disappear in the move?), so let's take that one off the table. As to where we are in the business cycle, you have a good point, we probably should be running somewhat lower deficits now, but only by a moderate amount, I'd think. At the equivalent point in the prior cycle, were we still running deficits this large? I don't know. As to total debt accumulated, I don't think that is an issue other than as regards the amount interest payments require us to curtail other spending to meet the appropriate deficit target.

Posted by Al | May 3, 2007 1:09 PM

Matthew tells me there is no upcoming crisis with regard to upcoming government spending obligations (what ever happened to Matthew's "There Is No Crisis" sidebar item? Did he remove that a long time ago or did it disappear in the move?)

Wait...who could possibly be so dishonest or so stupid as to imply Social Security represents all government spending obligations?

Oh, wait -- it's Al. Never mind.

Posted by grh | May 3, 2007 1:24 PM

I think that a fundamental porblem is "the defecit" has become short hand for talking about the budget to the point taht it has become the be all and end all. The reality is what matters is what the governemtn spends money on. You could have a surpless and it would still be bad if the government was spending on the wrong things.

A defceit doens't matter if you are spending on things that increase revenue in the future. Others have touched on this, the correct analogy is a mortage vs groceries for a person. It is fine to go into debt for the purchase of an asset that will increase in value faster than the interest rate on the loan, running up a visa bill to buy milk every day is of course a recipe for bankruptcy eventually. The same applies to the government. To steal from the late great Molly Ivins, even Texas, the labratory for bad government, is smart enough to know you run a seperate budget for Capital investments.

Posted by Eric | May 3, 2007 1:36 PM

So, I deny that the loan analogy is any good. Suppose I have two options: A. I can live a life of luxury now, guaranteeing me poverty in my retirement, and B. I can live in moderation now, allowing me to avoid poverty in retirement. Well, something can be said for each option. Perhaps picking A rather than B (or vice versa) is irrational, but there is no moral issue here: neither choice makes me immoral.

Next, suppose I have these two options: C. I can live in luxury, guaranteeing poverty for those around me, and D. I can live in moderation, allowing those around me to avoid poverty. Well, even though A is relevantly like C and B is like D, here morality enters in. Choosing C is plausibly immoral in a way that A isn't. And that's because now we're dealing with multiple people and not just myself.

So, the mistake is to think of a nation as just a single person who is choosing how to use resources over the course of his life. Rather, a nation is composed of many people, some living now and some living in the future. Because of this, a policy that allows us to avoid burdens now while placing burdens on future people has a real chance of being immoral, over and above however irrational it may or may not be.

Posted by Justin | May 3, 2007 1:40 PM

I for one don't mind making my kids pay for the war and social programs of my day. After all, I'm going to pay for their textbooks in college, and then they'll sell them at the end of the term and keep the money. I think it's a 1 for 1.

Posted by mike | May 3, 2007 1:41 PM

Matt, the ethical relationship between me and future versions of me, and the relationship between between me and future generations of not-me, are two entirely different relationships.

Posted by John Emerson | May 3, 2007 2:32 PM

Here's the logical problem everyone is missing: investment itself is inethical, if considered in terms of future generations. Capital gain is by definition short term gain without consideration of externalities, which tend to decrease real wealth through pollution, resource depredation, and social fraction.

In an economic system without usury, a cost-benefit analysis on deficit spending might have some meaning. In ours it cannot.

Posted by Deets | May 3, 2007 3:22 PM

John, (the one complaining about entitlements, not Emerson)
The majority of our federal budget (which is not social security) goes into two things, military and paying off the national debt. (It is projected that Medicare and such will take up a far larger chunk, but only if medical costs continue to rise exponentially, which is another debate.) The small changes in costs due to entitlement programs are dwarfed by the amount spent on military affairs. If memory serves me right, our deficit in 2006 was roughly equal to the increase in military spending plus the costs of the "emergency spending" on Iraq and Afghanistan.
My point is really that our large national debt is not due to entitlement programs, but due to bad investments. Money spent on the military and paying off the debt does not increase future economic growth, and does not really provide an immediate benefit (with the obvious exception that the military provides defense, a necessary thing). Programs which do increase future growth could be: education programs (human capital), transportation, health services (worker productivity), and so on. The government spends on these programs, because they are public goods, meaning that regular market functions will not provide for them. By spending money now, they will increase future growth (better infrastructure, better workers, better security, etc); that increased growth should lead to increased tax revenues, which can be used to pay off the debt accumulated to pay for those services. As has been said many times on this board already, the problem is when deficits are used to pay for regular costs, (analogy being paying rent and groceries on the credit card) which leaves the country in a pickle if a recession happens.

Posted by Tim | May 3, 2007 3:23 PM

I think Matthew's point is that it's OK to burden future generations with debt if you use the borrowed funds to invest in assets that will also benefit those same future generations.

This is fine, but a deficit is not the same thing as a debt. If you're running a deficit, that means you're adding to your debt year after year. Even if you use all of the borrowed funds on sound investments, there comes a point when you become so leveraged that you're still being foolish.

Also, as many others have pointed out, this assumes that the borrowed funds are in fact used to invest in things that will benefit future generations, rather than to allow ourselves to avoid giving up stuff that benefits only ourselves in the here and now.

Posted by JP | May 3, 2007 3:25 PM

...or, I should hasten to add, stuff that benefits nobody.

Posted by JP | May 3, 2007 3:26 PM

Here's the logical problem everyone is missing: investment itself is inethical

um, no

Posted by JP | May 3, 2007 3:27 PM

There are two sides to any deficit - taxing and spending. Views on the deficit hinge, I think, on which side caused it.

When the government is investing in something - infrastructure, emergency defense spending, doing something short term to create some jobs - whether you favor the deficit spending or not depends mostly on the how you weigh the benefits and the costs.

When the government runs a deficit because it cut taxes to increase wealth on hand for the wealthiest of the wealthy of wealthy - and there's a good case that that's what we've got now (see krugman's latest) - and not make an investment of any kind, whether you favor the deficit spending or not depends more on how you weigh the different classes.

There's an optimum deficit as a percent of GDP in the first case, but not the second.

Posted by The Black Monk | May 3, 2007 4:05 PM

When the government runs a deficit because it cut taxes to increase wealth on hand for the wealthiest of the wealthy of wealthy - and there's a good case that that's what we've got now (see krugman's latest) - and not make an investment of any kind, whether you favor the deficit spending or not depends more on how you weigh the different classes.

But that's an investment too. You're effectively investing in the wealthiest classes, placing a bet that what they choose to do with the money will grow the economy enough to make the investment worthwhile. I suspect you're no more a fan of trickle-down theory than I am, but that's the argument at any rate. They don't see it as a pure giveaway.

Interestingly, this discussion has a lot to do with the plan to privatize Social Security. Effectively, privatization would involve the government borrowing huge sums of money from China et al, and allowing each of us to invest a chunk of that money in the financial markets in hopes that we would grow the investment at a faster rate than the rate of interest on the original loan from China. This is the real-world explanation of what usually gets called "transition costs," representing the fact that in a privatized SS system, you'd actually need enough cash for everyone to invest.

Posted by Steve | May 3, 2007 4:16 PM

It could be argued that we have a moral right to have large deficits and impose them on future generations. Assuming real per capita gdp continues to grow at a positive rate in the indefinite future, and scientific research continues to produce lifestyle-improving inventions, there will be a fundamental inequality between current generations and future ones. Based on this assumption, we could make a progressive taxation argument for sustaining deficits, incresing the debt, and taxing those wealthy future generations at a greater rate than the relatively impoverished current generation.

Posted by T.A.R. | May 3, 2007 5:11 PM

It would be best to do an investigation in the moral philosophical aspects of debt, period. Government debt, deficits, are no different than other kinds of debt.

Debt, and finance, determine economic performance. It isn't hard work or free markets per say or anything else but the availability of money, liquidity, which is the foundation of modern economic performance.

While Uncle Sams total debt is around $7 trillion I believe, this is a mere sliver of total US debt and an invisible portion of world debt. Debt, ie credit, is growing at an astounding pace worldwide. The creation of credit has been totally unhinged from banks and government. Huge portions of credit now serve to inflate asset prices. This is why the rich are getting so rich while everyone else is just muddling along. In 1980 it $1 of debt resulted in $1 of GDP growth, Today it takes $7 of debt to produce $1 of GDP growth.

Some liken this to a Ponzi scheme. I tend to but don't have no clue how long it can continue. Decades are a possibility. Who knows? One thing is almost certain. Total credit cannot shrink, it must continue to grow to help service older debt. The mortgage mania was induced by Greenspan et al with the motive of generating credit growth.

Posted by rapier | May 3, 2007 5:11 PM

Semantical nitpick: When you find yourself writing "because since," it should be a clue that your sentence is ill cast and needs to be rewritten. "Since" is synonymous with "because" in this usage, which means you're really saying "because because." That's, you know, awkward.

Posted by Swift Loris | May 3, 2007 5:30 PM

JP,

What, then, is the difference (ethically) between saddling future generations with financial debt through deficit spending, and saddling them with, say poisoned air and water, exhausted metal ore, exhausted high-energy fuels, overcrowding, increased cancer rates, class war, or resource war (just to list a few of the more obvious consequences of short term social planning)?

If there an enterprise that is sustainable, profitable, and scalable, I'd like to hear about it. Short of that, what we talk about in the abstract when we talk about "investment" is stealing from future generations.

Posted by Deets | May 3, 2007 5:51 PM

You've outsmarted yourself, Matt. Do a thought experiment: cut taxes to zero and vastly increase spending outflows. Very quickly, confidence in the U.S. dollar will collapse as the national debt goes through the roof, thus leaving individuals conducting microeconomic activities with no sensible currency unit for transactions, what with the hyperinflation that follows.

So, it's clear that astronomical debt ratios produce total economic meltdown and widespread improverishment. Leaving your children to face that scenario is unquestionably a moral issue.

Smaller deficits lead to smaller negative effects on our macroeconomy, but the basic moral question is the same - hurting the economy today is bad, and that may be reducible to a pragmatic issue of self-interest akin to an individual investment decision, but hurting it in a way that won't take full effect for 30 years is a moral issue for people that have no say in these decisions.

It's no different then planting nuclear waste.

Posted by glasnost | May 3, 2007 6:41 PM

Interest rates peaked in 1982 at the very same moment that Uncle Sam's deficits started to explode. That trend has now broken or at least the downward slope in rates has paused..

The point is that prior to 1980 I doubt you would find anyone in the world who would have predicted that market rates would trend lower long term at the same time that Government deficits were rising. Sometimes rising dramatically Of course Republicans would never have argued that and in fact it was an article of faith the opposite was an absolute certainty. The standard macro economic consensus said the same thing. In fact both parties pretty much still say the same thing, that government deficits cause higher interest rates, even though a full generation of results show nothing of the sort.

In other words you can go crazy arguing these macro economic issues in terms of government deficits on economic and market performance and your likely to end up knowing nothing. US government debt isn't nothing but in the big scheme of things, for a generation, it hasn't meant much in the big scheme of things. Mostly such arguments center around and are decided upon by individuals and groups on partisan political basis in order to score rhetorical points.

There are gigantic systematic issues involved in credit and debt which deserve far more interest than they are getting. Government debt is only a tiny portion of that. Concentrate on it and your missing for forest for the trees.
.

Posted by rapier | May 3, 2007 9:22 PM

Everyone has already pounded this point into the dust, but I feel compelled to stomp on the damp spot where it used to be:

The "burdening our children" argument is an INTENSIFIER of the badness. It's one thing to make a bad investment yourself. But it's morally culpable to make a bad investment which you expect somebody else to pay off. And it's even more morally culpable, on the irrefutable axiom that "cute things carry greater moral weight", to make a bad investment which you expect CHILDREN to pay off.

Then, there's the silliness of treating an investment/loan as something which is either good or bad, rather than something probabilistic which carries a certain risk factor of goodness or badness, and where the downside risk intensifies as the loan gets larger. Which is the reason why people would not praise you for driving 100 mph when your kids are in the car, even though that might turn out to be a really worthy time-saving investment in their careers.

It's particularly weird for Matthew to make this argument when he himself says he can't figure out whether deficit spending is good for the economy or not. If you think the risk of the investment is impossible to assess, then the fact that your children, not you, will be paying off much of the cost because a very morally salient factor indeed.

Posted by Matt Steinglass | May 4, 2007 5:42 AM

Oh jesus wept, did Frank Ramsey die in vain? Apparently so.

Look at it this way. If the government is buying something that will last for several years (a road, say, or an aircraft carrier), does it make any sense at all to say that this must be financed out of one single year's taxation? No. Therefore, it must be permissible to run a deficit for investments.

Since the government is likely to be making investments in every year, then it is quite possible that, other things being equal, it will run a deficit every year.

Oh no, this means that the debt will go on growing and never be repaid! It's a Ponzi scheme I tell you!

No. The debt continues to grow as there is a net deficit every year, but as long as it does not grow faster than GDP in the long term, you can have a constant deficit while maintaining service on all the debt contracted. Meanwhile, our children get to have roads and aircraft carriers.

Posted by dsquared | May 8, 2007 1:29 PM