National elections in the United States seem to escalate the verbal jousting over the federal deficit and debt. I awoke one morning recently to the exhortations of Rush Limbaugh regarding the perils of the federal debt and the burdens we are postponing to our offspring. We are spending our children's inheritance, he exhorted.
Amid the gloom and doom debt/deficit talk came reports that same week from the Commerce Department indicating that the U.S. Gross Domestic Product expanded 4.2 percent last quarter, the biggest boom in two years, and spending on new construction was up 1.2 percent in June, the strongest commercial building in more than two years. Meanwhile, the Labor Department announced that first-time claims for jobless benefits were down to the lowest level in more than 7 years.
Of course, if you predict doom long enough, eventually doom will happen. That doesn't necessarily reflect one's predictive powers, however. Considering the track record of those who have predicted 'bankruptcy' for U.S. if we don't mend our deficit spending ways, it's a wonder that any adult takes them seriously anymore. But many do, in large part because most of us identify "family" and "business" with "federal government." A family or a business often do go bankrupt when they chronically spend more than they take in. If they can't generate the funds to meet the obligations to their creditors, the creditors can come after their assets.
A nation, like the United States, can inflate its money supply to meet its obligations. It can also tax, but raising taxes gets politicians booted out of office. The U.S. government can borrow from the public or from the Federal Reserve System, which purchases U.S. government securities on the open market (not directly from the U.S. Treasury). Whenever the U.S. government 'borrows' from the Federal Reserve it creates money that expands the money supply. Macroeconomists mostly understand this process and so worry less than politicians, businessfolk and talk show hosts about the federal debt/deficit -- the latter groups mostly identify the federal government with "family" or "business." In physics this would be tantamount to treating the 'insides' of the atom using everyday notions of 'space,' 'time,' 'colors' ....
The doomsayers often don't appreciate the symbolic nature of modern money. The vast majority of dollars, for example, don't exist as bills and coins. Most of our money today are numbers stored in computers. The value of our money lies ultimately in the goods and services they can purchase. To make ourselves comfortable with this notion perhaps we should practice saying "I have 20 and a half units of purchasing power" instead of saying "I have $20.50."
As a result we could more readily see the absurdity of those who claim we are spending our children's money. This is tantamount to saying we are using up our children's words! If the numbers of words were fixed then we might benefit our offspring by one day of silence each week. But no matter how much we talk, we can always find more words ... or at least Limbaugh can.
The major risk of expanding the money supply is the creation of consumer demand that exceeds production capacity. This can lead to inflation, the 'hidden tax' of deficit spending financed by money creation. The key to the well-being of any society lies in its production. Without production of goods and services we could have all the money (or gold) in the world and be as poor as tree squirrels. In our economic life we find a natural order of evaluation: production (GDP) comes first in importance, followed by distribution then consumption. If there were no production, there would be nothing to distribute and therefore nothing to consume. Money serves as a means of 'communication' in an economy, facilitating the production and flow of goods and services by symbolizing in an exact way the wealth we produce. Intrinsically, though, modern money has no particular value -- unless you construct your Halloween costume out of dollar bills or bank statements.
If we live 'high on the hog' it is not because we have a lot of money but because we produce so many useful goods and services ("GDP"). If we want to do our children a favor we will worry less about our federal deficit/debt and attend more to sustaining and developing real wealth (communications and transportation systems, quality education, robotics, alternative sources of energy, natural resources ...) so that succeeding generations can meet their needs and aspirations. If we give our offspring the means of production they can generate whatever money they need to make the goods and services flow. A lack of funds need not hinder future generations, anymore than they should be hindered by a lack of words. Whatever they need, they can create, just as we have, although perhaps with less guilt.