Wayne Winegarden

Over 2,400 years ago the famous Greek historian, Herodotus, counseled that “Haste in every business brings failure.” Now in power, President Obama and the democratic Congress are moving with great haste to spend an additional $850 billion of taxpayers’ hard-earned money (perhaps more) on top of the nearly $1 trillion that the government has already thrown at the current economic crisis, which not coincidentally, was also allocated in great haste. As Herodotus would likely predict, the economic stimulus that this money is supposed to create will come to naught.

The government does not have an extra $2 trillion lying around. Consequently, they will need to increase the national debt in order to pay for the increased spending. Putting this in perspective, between 1776 (when the Colonies started incurring debt to pay for the Revolutionary War) and 2007 the U.S. accumulated a total debt of around $10 trillion. An additional $2 trillion increases the national debt by around 20 percent!

The proposed increase in government debt is an exercise in futility that will exacerbate the economic crisis and burden future generations with higher taxes in order to repay this unprecedented and ill-advised fiscal excess.

Public debt, like private debt, is not necessarily a bad thing. Certainly Bill Gates and Michael Dell must be pleased with the debt burdens they incurred early on in the life of Microsoft and Dell Computer. Similarly, the debts the U.S. government incurred to fight World War II can be viewed as a worthwhile investment. The key to understanding the ultimate impact of the government debt is an understanding of where this money is coming from, and where it is going.

There is no top secret source of revenues for the U.S. government. The government must borrow money in the same debt markets as other government or private entities. Consequently, the dollars that the U.S. federal government raises to fund its debt comes from the same potential investors who could have invested their money with private companies or state and local governments.

In an efficient market, the ability of borrowers to repay their debts is assessed. Those borrowers deemed less likely to repay their debts must pay higher interest rates to compensate for the higher risk the lender is taking. Due to its taxing authority and perception that the U.S. government will always repay its debt, the debt of the U.S. government is considered to be the “safest”.

Wayne Winegarden

Wayne H. Winegarden Ph.D. is a partner in the firm Arduin, Laffer & Moore Econometrics.

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