[p]olitical leaders, both legislative and executive, with public support, act as if it is possible to spend without taxing, indeed as if the fisc offers the political equivalent of perpetual motion. This observed fiscal profligacy stems from diverse sources: institutional history, Keynesian follies, supply-side exaggerations, and, finally, the very logic of collective action, which fosters the personalized illusion of something for nothing, especially amid the natural constituency pressures of representative democracy.Everything about that paragraph is correct but for the implication that it is not possible to spend without taxing. It is possible for the federal government to spend without taxing; it can simply borrow (or it can print money, which would amount to the same thing). Taxation and borrowing have similar results from the government's standpoint; that is, both allow the government to commandeer resources and put them to work on things deemed "important" to government officials and their constituencies. But taxation and borrowing do differ in their effects on the public.
1. Through taxation, government confiscates taxpayers' claims against current output and converts those claims to government programs that (for the most part) either increase the incomes of certain persons (e.g., most welfare recipients and many government employees who otherwise would fare less well in the private sector) or create "psychic income" for the proponents of those programs (even as those programs erode economic performance).
2. Borrowing doesn't change the effects of government spending, but it does fund government spending in an importantly different way. That is, lenders (unlike taxpayers) voluntarily relinquish their claims on current output, in return for larger claims on future output (i.e., principal plus interest). And those claims on future output can be redeemed by additional borrowing in the future. (As I have argued here, there is no obvious limit on the amount the amount of debt the government can accumulate. I assume, of course, that the government's appetite for spending would not become voracious enough to bring the economy to its knees.)
3. When the government borrows from foreigners instead of Americans, those foreigners willingly assume the real "burden" of the debt; that is, they relinquish some of their claims on the current output of the U.S. economy. Foreigners can transfer their "burden" to Americans only as Americans are willing to buy government debt from foreigners. To the extent that government spending provides any benefits for Americans, foreigners are doing Americans a big favor by lending money to the government. Why? Because they are subsidizing the output of government services that are, in the main, "enjoyed" by Americans.
