Do Future Generations Pay for Deficits?

Tyler Cowen at Marginal Revolution asks and (sort of) answers the question. Here's my take:

1. Government spending, however it is financed, commandeers resources that could have been used to produce goods and services.

2. Some of those goods and services might have gone into current consumption, others into growth-producing capital investments.

3. The financing of government spending through taxes and borrowing determines precisely who forfeits their claims on the production of goods and services and, therefore, how much and what kinds of private consumption and investment are forgone because of government spending.

4. It is safe to say that government spending reduces economic growth to the extent that it reduces private-sector investment. (Read this post for a debunking of the notion that government spending on R&D is more productive than private spending on R&D.)

5. Given the difficulty of determining the incidence of government spending on investment (as opposed to consumption), the marginal effect of government spending can be approximated by the real, long-term rate of growth of GDP. That rate -- which reflects the growth-producing effects of investment spending on total output -- was 3.8 percent for the period 1790-2004. (Derived from estimates of real GDP available here.)

7. The real, long-term growth rate undoubtedly is lower than it would otherwise have been, because of government regulations and other growth-inhibiting activites of government. That is to say, government inhibits growth not only by commandeering resources from the private sector but also by dictating how the private sector may conduct its business.

8. Until the onset of the regulatory-welfare state around 1906 (explained here), real GDP had been growing at a rate of about 4.6 percent. Since the onset of the regulatory-welfare state, real GDP has grown at a rate of about 3.3 percent. (Derived from estimates of real GDP available here.)

9. In sum, the regulatory-welfare state has robbed Americans of untold trillions of dollars worth of consumption and wealth. I once estimated the current GDP gap to be about $8 trillion; that is, real GDP in 2004 was $10.7 trillion (year 2000 dollars), but could have been $18.7 trillion were it not for the regulatory-welfare state. Considering the apparent effect of the regulatory-welfare state on the rate of economic growth, the actual GDP gap is probably much greater than $8 trillion.

The answer to the question about who pays for deficits is this: All generations pay for government spending, however it is financed. And the cost just keeps piling up. It's not the deficits that matter -- future generations inherent the bonds as well as the interest payments -- it's the spending that matters.

Other related posts:

Curing Debt Hysteria in One Easy Lesson
The Real Meaning of the National Debt
Debt Hysteria, Revisited
Why Government Spending Is Inherently Inflationary
A Simple Fallacy
Ten Commandments of Economics
Professor Buchanan Makes a Slight Mistake
More Commandments of Economics
Productivity Growth and Tax Cuts
Risk and Regulation
Liberty, General Welfare, and the State