The Unseen Cost of Government Largesse

Recent US government data shows that the country has exceeded its $31.5 Trillion After years of caring baseline spending on entitlements and emergency COVID-19 spend in the last few production years, debt limit record-busting deficits. The Republican majority of the House of Representatives is now facing an intransigent Senate and White House. It was elected largely on economic issues like inflation and runaway expenditure. As does the ritual brow-beating by all those who oppose raising the debt limit, a showdown seems likely. “without conditions,” As President Biden demands.

For all those who will unavoidably cry “Don’t use the debt ceiling as a negotiating tool!” over the coming weeks and months, it should be pointed out that it is the only tool that has been even remotely effective at taming Congress’s appetite for spending. Just as a drug addict can only be rescued when they are in crisis, debt limit negotiation is the only way Uncle Sam has been willing to accept modest limits on government spending in recent years.

Libertarians as well as conservatives rightly condemn the rapidly growing national debt. They see it as an embarrassment and threat to the nation. Inflation (as the Federal Reserve must expand its balance sheet to purchase the Treasuries that finance these huge deficits, as happened most clearly in the pandemic’s peak), and a promise of higher future taxes. All these observations are correct, but one effect of huge government spending and deficits is often ignored in conservative criticism: the loss of private capital investment and consequently forgone economic growth. This is often called the “The” Effect. “crowding out effect.”

The idea is that there is an amount of money that institutional and individual investors are willing to lend or invest. This is what economists refer to as the “loanable funds market.” As with all supply curves, the supply of loans slopes upward and to one side. The interest rate, which is the price of a loan, rises and more people will want to lend loans. However, the demand for loans tends to go down and to the right, much like a demand curve. The interest rate drops, which means more people want to borrow money. Think of any other opportunity. Normal supply-demand diagramBut the good being discussed is a loan, not a physical product or service. “interest rate” Instead of “price,” As in other markets.

The amount of capital investment needed by businesses (which in turn is a function how profitable these capital investments are), how many consumers require to purchase homes and new cars, and how much money government must borrow. A game in which the total amount of loanable funds is equal to $5 trillion would mean that $1 trillion of the $1 trillion in government deficits will be available for private investments in new innovations that improve the quality of life, provide new medicines and create new employment.

An increase in government deficits shifts the demand for loanable money to the left. This increases the price or, in this instance, the nominal rate of interest. Elementary economics students know this. If the government has a large deficit, many private sector projects will no longer make sense at 4 per cent interest. This means that investors must pay more to finance that deficit. Temporarily masking this effect by increasing the supply of loanable money through monetary expansion (as happened during the COVID pandemic at incredible speed) can be difficult. However, this spurs inflation that reduces real returns and hampers economic growth (the stock market’s Since late 2021, runaway inflation has had a devastating effect on returns This is just one example.

Contrary to Keynesian “money multiplier” The theory states that government spending stimulates economic activity by circulating money via transfers payments. Unlike savings that would otherwise remain in savings or uncirculated, nearly all developed nations have no savings locked away. Moths, rustNot saved, but invested. Of every dollar put in the bank, more than 90 percent is invested in loans for commercial enterprises, in home loans, and in bonds, and this doesn’t account for the fact that a larger and larger share of surplus savings in the United States are not in the traditional banking system, but in brokerage accounts, 401(k)s, and elsewhere.

The economic power and value of money is not multiplied by government spending, but it is diminished. Cuba, North Korea, Venezuela, and Venezuela, if the reverse were true, would be the richest nations on the planet. Nearly all economic activity in these countries is made possible by government spending. They aren’t, but the fact that countries with relatively open markets like the United States, Singapore and the United Kingdom and Japan pull ahead economically shows that private investment in innovations and technology of the future is more effective than government transfer payments in facilitating economic development.

Each dollar that the government borrows is a dollar that private businesses and individuals cannot borrow. This reduces economic growth and jobs creation. With America’s debt now hovering near 125 percent of GDP (before netting for debt held by government entities) and deficits topping $1 trillion yearly as far as the eye can see, we can no longer ignore this drag on the American economy.