07 November 2006

What Even Conservatives Don't Understand About Deficits

I've heard liberals and conservatives express confusion about why supposed conservatives would support such large and sustained deficits. There is a good reason for this.

If your major constituency is the rich, there is a very good reason to sell as many bonds as you can. When the government spends more than it takes in from taxes, it has to close the gap by selling bonds - getting money today by promising to pay interest on that debt over a defined period of time. If you are rich, the backing of the United States is about as sure a means to protect your money as you can find. If you are sufficiently rich, you have an incentive to protect at least a portion of your money in very safe investments.

So, what is the downside? One is that the fastest growing portion of the government budget is interest payments. Interest payments squeeze out other expenses. The other is that the government squeezes out the private sector in investment markets. Quite simply, if the government did not sell any bonds, investors would be forced to put them money into the private sector - corporate bonds or equities.

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