June 18, 2007 1:16PM

Government Spending Matters, not Deficits

Investor’s Business Daily correctly explains that government borrowing is not a problem. The deficit is small as a share of GDP, and is expected to stay low for several years. The real problem is government spending. Whether that spending is financed by taxes or borrowing, it causes a misallocation of labor and capital, particularly since most government outlays are for consumption and transfer expenditures rather than core public goods such as maintaining the rule‐​of‐​law. The editorial also warns that some deficit alarmists have a not‐​so‐​hidden agenda of higher taxes:

It’s fashionable these days, for Democrats and even some Republicans to style themselves as “fiscal conservative” to advocate the end of government red ink. Some of them mean well, to be sure. Certainly, no one wants to see a budget deficit forever — or one that expands to a point that it impairs our government’s ability to function. But we’re so far from that right now it’s easy to think those who push for the immediate elimination of the deficit have another agenda entirely. …Last year, the deficit hit $248 billion. Sounds like a lot, but in a $13.6 trillion economy, it’s not. It’s the equivalent of a $900 dollar credit card charge for someone with a $50,000 income. As a share of GDP, the budget deficit last year was 1.9%. That’s down from 3.6% in 2004 and below the long‐​term average of 2.5%. This year, says the CBO, the deficit will be about $177 billion, or 1.3% of GDP. …For those who argue the deficit is such a bad thing that we need to raise taxes to get rid of it, this too is wrong. As Nobel‐​winning economist Edward Prescott has noted, workers are highly sensitive to tax rates. They work and earn more when rates fall, less when they rise. It’s common sense.