Governments around the world have wratchetted up spending and money creation in order to prevent financial depression and recession. Where does this money come from? Is it really an bottomless well?
By my reckoning, there are four places that governments can turn to when they need spending money: taxes, cutting other spending programs, borrowing (which is really pledging future taxes), and printing money.*
Raising taxes is direct and in your face. It hurts you and is easily addressed by the general public. Because it must be done openly, it is seldom a problem. Voters promptly and regularly remove many politicians who advocate raising taxes.
Borrowing is directly a threat against nonvoters for the most part: our children and grandchildren. While the responsible among us are against deficit spending for just this reason, the childless and the simple among us are in favor of deficit spending because as far as they are concerned, it is a free lunch. My father once said that a manager was much better in general if he had a family and children, because he thought longer range than inexperienced men. The important point to remember here is that the piper must still be paid. Whatever we consume and don't pay for burdens future generations.
Cutting spending from other organizations in government to pay for the popular program-of-the-day is seldom popular, but better than raising taxes. President Herbert Walker Bush and Bill Clinton showed what was possible by
cutting our country's military spending by 10% from the Reagan years. Military spending was generally not very popular domestically, and with the Cold War perceived to be over, it seemed reasonable to cut. Interestingly, in all of those years of cuts, Total Federal Outlays increased significantly.
Borrowing (taxing future generations) is more popular than expense-cutting, because no impact at all is felt on the voting population who gets their news off the Comedy Channel. People who DO care about the cost to their children save privately and are not terribly outspoken. Politically, this "Road to Hell" has been well-travelled.
The debt-markets DO pay attention to government's solvency, and so the borrowing route does have an end point. Governments whose credit is exhausted, rather than take on the unpopular expense-cutting, engage in the worst subterfuge of all: devaluing their currency (commonly called "inflation"). Printing more currency is done with a word, and the bills get paid - but an insidious machinery is set in motion. The limited quantity of goods are bought with the newly-printed currency, and there is money left over. That left-over money is used to bid up prices on labor and goods, starting a spiral upward until the excess is soaked up. People who live on a fixed income or who cannot pass on increased costs become poorer by the day. People's cash savings become worth less.
"Boiling the frog" is the psychological trap the unwary get caught in. The story goes: "If a frog is thrown into a large pot of boiling water, he feels pain and straight away hops out. Except for singed feet, he is unscathed. If however, the water temperature is brought up gradually, the taxpayer - I mean frog - at first feels good, then progressively gets groggier and weaker. When the water is finally brought to boil, he is so weak that escape is impossible.
Inflation is the most cruel of the four ways, but an ignorant public cannot see the culprit because of the fog before their eyes.
In conclusion: whatever government spends on programs beyond their means, taxpayers pay for. We pay directly, in taxes. We pay indirectly, by charging the cost to our children. Or we pay indirectly, by a devaluation in our currency which makes the dollars we hold worth less reducting the value of our savings.
Concentrating on taxes is an illusion. The only concern we should have is what our government spends. We pay for it all, one way or another.
*If a reader will help me with a source, this idea originally came to the author from Milton Friedman or Jude Wanniski, but I have not found the source.
