Do we need to worry about whether the federal budget is running a huge deficit? Or do we need to worry about the avalanche of new government spending? I have often argued that it doesn’t matter how the government finances its spending — the adverse economic effects come from the draining away of resources from the private sector and how the feds confiscate the money to get them is irrelevant. Economist Alan Reynolds argues here for the “look at federal spending, not at the deficit” view.
You might think about it this way. If a very large company with plenty of cash on hand wants to invest in some new equipment, does it make a difference whether it pays cash or borrows the money? No. What matters is how productive the investment is. If it is worth buying, a decision to borrow to get it is not terrible; on the other hand, if the equipment is useless, the fact that it was purchased with cash doesn’t make the decision wise. Most of what the feds now spend money on is the equivalent of buying worthless machinery. That’s the problem.
