Sunday, June 26, 2005

Nicholas Kristof Is an Idiot

Nicholas D. Kristof, a Lefty columnist for The New York Times, today succumbs to budget-deficit hysteria. Here's a sample:
[T]hree-fourths of our new debt is now being purchased by foreigners, with China the biggest buyer of all. That gives China leverage over us, and it undermines our national security.
Let's see here: We have China's money; the Chinese would like to get it back from us, with interest. Who has leverage over whom?

I wonder what Kristof would have to say about government debt if Clinton were still in the White House and the debt had been incurred to buy out America's health-care system and give flying lessons to members of al Qaeda?

Kristof, like most debt-hysterics (or pseudo-hysterics) misunderstands the true significance of the central government's debt. I summarized it here:
The debt really is a measure of the extent to which spending by the U.S. government has exceeded taxes collected by the U.S. government since 1789. In other words, the damage has already been done: first, by government spending, which on balance diverts resources from productive uses; second, by the inflationary effects of government spending, which deficits merely aggravate.
...and explained it more fully here:
Government spending, however it is financed, is a way of commandeering resources that otherwise would flow to private consumption and investment (i.e., capital formation). To the extent that government activities fail to pay their own way by yielding goods and services of equivalent value -- and they don't (a) -- the resources used by government are simply wasted -- thrown down a rat hole (b).

Government nevertheless goes through the charade of taxing and borrowing to finance its activities, instead of simply sending goon squads to impress those resources into government service. Thus the total amount of money in circulation remains more or less unaffected by government spending, while the total output of real goods and services (including capital assets) is reduced as government commandeers resources. The result, of course, is inflationary (c).

In particular, the injection of government bonds into financial markets, with the help of the Federal Reserve's authority to create money, means that the total nominal value of financial assets is at least the same as it would have been in the absence of government borrowing, and probably higher (d). At the same time, government spending reduces the output of real assets, thus diluting the value of financial assets. Financial assets are fungible, so the holder of a government bond has the same claim on real assets as the holder of, say, a share of Berkshire Hathaway stock.

Think of it this way: Every time the government issues a new bond because it's spending more money, your real share of stock in America's economy becomes worth less, even if the nominal price of the stock rises. Depressing, isn't it?
a. An official estimate of the annual benefits flowing from federal regulations places the value of those benefits at less than $200 billion. But the annual cost of those regulations -- including the hidden costs not included in the government estimate -- is approaching or has exceeded $1 trillion, as discussed here, here, here, and here. But that's just the tip of the iceberg that rammed into the American economy about 100 years ago, as I [have shown] in Part V [and the addendum to Part V] of "Practical Libertarianism for Americans."

b. I exclude most expenditures on defense and justice from that indictment.

c. That is, government spending causes prices to be higher than they otherwise would be because total spending remains about the same as it would have been, whereas real output is reduced. Whether or not those nominal prices rise (the usual meaning of inflation) depends on the rate at which government spending grows relative to the growth of output of real consumer goods, services, and assets.

d. The total nominal value of financial assets is approximately unaffected by government borrowing, if you accept the crowding-out theory. The total nominal value of financial assets rises with government borrowing if you don't, if you don't accept the crowding-out theory. I don't.