Understanding Government: Debt

One of the more notable features of government is debt.

When some entity spends more than than it takes in, the result is a deficit. The sum of deficits and surpluses is debt.

Governments are more likely to accumulate debts than private entities. One reason for this is that the people who run the government are not using their own money. Thus they are less likely to act responsibly. Another reason is that government has the power to tax, so it can pay its debts by force.

Democracies are more likely to accumulate large debts than other governments. The reason for this is that in democracies, there is public pressure to redistribute money.

The "national debt" of the United States in 2007 was officially about 9 trillion dollars. However, this figure ignores the unfunded liabilities of entitlement programs like Medicare, Medicaid, and Social Security. With these figures included, the present value of the real national debt is approximately 59 trillion dollars. That's $59,000,000,000,000.

Because of the dynamic of concentrated and dispersed interests, spending on redistribution programs will tend to increase and increase. People who forbear from receiving redistributed money must still pay the same amount in taxes. Thus they have an incentive to organize and create programs that redistribute money to them, or increase spending on such existing programs.

Politicians will tend to create entitlement programs, which promise guaranteed benefits far into the future. This will only accelerate out-of-control spending. The demand for spending on redistribution programs will outstrip people's ability to pay. Cutting spending will be politically dangerous, and directly raising taxes by the amount needed would be unpopular and unfeasible.

Most likely, they will borrow money. Redistribution practically guarantees that a huge government debt will be incurred. But government can only borrow money as long as people are willing to lend it. When the supply of lenders drys up, the most likely course of action will be massive monetary inflation, as the effects of printing more money can less readily be traced to politicians than spending cuts or direct tax increases.

But massive inflation robs people of the value of their money and guarantees massive price increases. This in turn leads to a painful economic collapse. This is exactly what happened in the Wiemar Republic in the 1930s and other countries at other times. This is an extraordinarily painful way to learn the lesson that you can't get something for nothing.

As Kipling put it in The Gods of the Copybook Headings,

In the Carboniferous Epoch
we were promised abundance for all,
By robbing selected Peter
to pay for collective Paul;
But, though we had plenty of money,
there was nothing our money could buy,
And the Gods of the Copybook Headings
said: "If you don't work you die."

Government debt is dangerous to prosperity. Government should spend less and avoid accumulating debts.