Inertia Wins!

Federal spending is going up. Tax receipts are going down. 2009’s federal budget deficit is now up to $1.27 trillion as a result. That’s about triple what even big-spending George W. Bush could manage. Total federal debt now stands at over $11.66 trillion.

Many other developed countries have built debt loads twice ours and more, and without apocalyptic consequences. So it appears such enormous shortfalls do not pose an existential threat to the economy. At least, not yet. But high long-run deficits do slow growth. To help end the recession, government should reduce the deficit by spending less. Three reasons why:

–Today’s deficit is tomorrow’s tax increase. Deficits are paid for by borrowing. What the government borrows, it has to pay back. Sometimes it puts off that taxation by borrowing money to pay back previously borrowed money. But some day, borrowed money ultimately has to paid back by taxpayers. Increasing deficits necessarily means increasing future taxes.

–Government borrowing crowds out private borrowing. The higher the deficit, the more crowding out. This point is underappreciated. There are only so many investor dollars to go around. The $1.27 trillion the government is borrowing to pay for this year’s spending is $1.27 trillion that now cannot go towards job-creating corporate bond issues or stock IPOs. Imagine the opportunity costs.

–More spending begets more regulation. Government money comes with strings attached, as GM now knows. And once a rule is in the books, it’s in there for good, usually. When government spends so fast that it has to borrow, the process accelerates.

The budget deficit is expected to rise even higher as 2009 runs its course. There are already 1,270,000,000,000 trillion reasons for government to cut spending to levels it can afford. How many more do Congress and the president need?