Hey Big Spender?

Whether it is Greece or the US, it seems as though the headline du jour involves government deficits and debt. The Obama administration has taken a lot of heat for its projected US deficit and debt ratios. But are government deficits and debt really the big economic issues or is it
government spending?

Whether it is Greece or the US, it seems as though the headline du jour involves government deficits and debt. The Obama administration has taken a lot of heat for its projected US deficit and debt ratios. But are government deficits and debt really the big economic issues or is it
government spending? Milton Friedman thought that the ultimate economic cost of government was not how the government funded itself, but how much funding the government was engaged in. Friedman understood that just as the Northwest Mountie always gets his
man, the federal government always gets its funds. There are three ways the federal government can obtain funds and all three are economically “bad.” The three ways are taxation, debt issuance or “printing.” If taxation is used, households will cut back on their
saving, which deprives the business sector of productivity-enhancing spending. If borrowing is employed, interest rates will rise, which will discourage businesses from engaging in productivity-enhancing spending. If “printing” is employed, the resulting inflation will also
discourage households from saving, which will have similar consequences as taxation. In the end, if the federal government spends more, it takes control of more productive economic resources, depriving the private sector of the use of these resources. The deprivation of resources to the private sector has a negative effect on productivity growth, which, in turn, depresses long-run real economic growth.

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