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A Rant – What is the cost to us of Government Spending?

(I reviewed this after the stimulus package was passed in 2020.  The logic is still accurate.  The increase in national debt as before finances a tremendous benefit to our country which is hurting from the effects of the COVID-19 virus, and the inept leadership of Donald Trump.  As with all such increases to the national debt and printing money, the eventual result is inflation.  Our economy has thrived for the last 60 years and experienced massive inflation over that time.  The lesson is: stimulus package good; increase in debt no big deal.)

(I wrote this in 2014, well before the Trump administration passed a tax bill that increased our debt by almost a trillion dollars to be paid by mainstreet citizens to the benefit of the extremely wealthy)

One of the most telling and scary ghost stories concocted by our demagogue politicians is that of horrible consequences of stimulus programs funded in part by an increase in National Debt.

The argument is that every dollar we borrow will burden our children in later years.  The main trouble with this argument is that it sounds plausible.  After all if I buy a new villa in the Hamptons and take a big loan to pay for it, and then don’t pay for it in my lifetime it will have to be paid by my estate or, effectively, by my children.

The corollary is, then, if I don’t ever use credit I will conserve more money to pass on.

What horsepucky!

First let’s look at how our government acquires funds and uses credit.

  • Collects taxes
  • Borrows funds when revenue is not sufficient to pay for programs authorized by Congress.
  • Pays down debt when there is a surplus (when revenue exceeds obligations).
  • Until debt is paid off there is interest to pay.

Businesses do a cost benefit analysis before borrowing money by determining.

  • What is the money for?
  • What will be the cost (interest)?
  • What will the money be used for?
  • How will it benefit the company?
  • How will it be paid back?

Take the same test to government credit.

  • What is the money for?
  • What will be the cost (interest)?
  •  What will the money be used for?
  • How will it benefit the people?
  • How will it be paid back?

As an example imagine a business that sells widgets considering using credit to increase profits.

  • We can increase production and our bottom line by investing in $5,000,000 in new equipment.
  • We estimate that investment will return additional profits of $2,000,000 per year.
  • If the annual interest is 40% then the additional expense represented by interest would be equal to the projected increase in profit.  Therefore we must decide at what level of interest below 40%  this borrowing to invest makes sense.
  • The board of directors may decide that 20% interest is the highest level that would make any sense.
  • Then if the interest rate were 10% ($500,000 per year to create $5,000,000 per year) it would be a no-brainer.
  • It would be paid back out of the increase profits at a rate that the board agreed upon.

Now imagine it as  a government.

  • Revenue is low because of the recession
  • By funding programs authorized by Congress to help citizens and companies,  jobs are created and profits for corporations are created..
  • This increases revenue by generating taxes. Income taxes, sales taxes, corporate taxes —  (No way to estimate exactly how much but with income tax, sales tax, other fee taxes, the return is well over 50% and certainly over 20%).
  • The current cost of borrowing the money necessary is less than 3%.  In recent years the high figure has been as much as 7% so we can borrow a trillion dollars for what we paid for 1/2 trillion a few years ago.  That’s a no-brainer.  Borrow money to create revenues way in excess of the 3% cost.
  • When and if the surplus warrants it the people (Congress) can order the debt repaid, reducing costs and they can then lower taxes or authorize additional benefits.

The benefit to citizens is prosperity and jobs.

The benefit to Corporations is profits

The benefit to the people (as government) is the ability to satisfy the needs of our country.

However, it does rob the demagogues of one of their favorite straw men.

Please comment, especially if you disagree with the logic.