The number one complaint that we hear about the deficit financing of the President?s so-called stimulus package is that we are forcing future generations to pay, i.e. that we are shifting the costs to our children. This is actually false. The fact is that the government, or anyone else for that matter, can only spend current revenues and can only utilize current resources. Every dollar that the government spends, even if borrowed, has to come out of some existing person?s pocket and therefore preempts the use of that dollar somewhere else in the economy?not in the future but in the here and now.
If the government borrows primarily from American citizens it is getting money that either would have been invested or spent elsewhere in the economy. But this is also true if the government borrows from foreigners. A good economist asks what else would these foreigners be doing with those dollars? Because they are dollars they ultimately will either be spending them on American goods thereby increasing exports, or otherwise investing them in the US economy.
Also, regardless of where the money comes from, government spending will always preempt other spending in the economy, not only on the borrowing side, as just noted, but also on the spending side. Those who get the borrowed funds will have purchasing power transferred to them. Because of this they will increase the demand for the resources that they use, increasing the cost of those resources to other businesses and consumers. In other words, government spending financed by borrowing, like all other government spending, preempts growth in the private sector.
What deficit financing does do is create a wealth transfer from future taxpayers to future government bondholders. When the bills come due, some of our children and grandchildren will, through higher taxes, have their income coercively transferred to others of our children, those who hold the debt.
