Debts and Deficits Are the Symptom, not the Disease

April 14, 2011

Deficits and debt matter.  Unfortunately, Washington's focus is often misplaced, as debt and deficit are the symptoms of government spending, not the disease.  The disease is government spending.  As a result, the only way to cure debt and deficits is to cut government spending, says Veronique de Rugy, a senior research fellow at the Mercatus Center.

There are several reasons why these deficits and debts matter, including:

Deficit and debt are the symptoms of overspending.

  • Government spending can be paid with three sources: debt, new money or taxes (or a combination of these).
  • All three of these methods of payment remove real resources from the private economy.
  • In other words, the government can't inject money into the economy without first taking money out of the economy.

Large and sustained deficits and debt inevitably cripple economic growth.

  • In a much cited empirical research study, economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard examine the consequences of public debt on economic growth.
  • Across wealthy and poor countries, the median growth rates for countries with publicly held debt exceeding 90 percent of gross domestic product are roughly 1 percent lower than they would be otherwise.
  • According to the Congressional Budget Office, current policies will get us to that level in 2021.

Debt is very expensive.

  • More borrowing means bigger interest payments.
  • In spite of historically low interest rates, by 2020, the federal government will spend a projected $866 billion each year just to pay interest on our debt -- more than what the U.S. spends right now on two wars, plus the Departments of Defense, Education, Energy and Homeland Security combined.

Source: Veronique de Rugy, "Debts and Deficits: the Symptoms, not the Disease," Mercatus Center, March 30, 2011.

For text:

http://mercatus.org/sites/default/files/publication/de%20Rugy.house_.ways_.means_.3.30.11.pdf

 

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