Book Review: The Truth About the National Debt: Five Myths and One Reality by Francis X. Cavanaugh

Tax Increases Are Not the Solution to Government Overspending

Harvard Business School Press • 1996 • 192 pages • $22.95

The last temptation is the greatest treason: to do the right deed for the wrong reason. In this book, Francis X. Cavanaugh, an astute former Treasury Department economist, applies these words of T. S. Eliot to most of the popular discussion of federal budget deficits. In using economic analysis like a bowling ball to mow down fallacious arguments, he leaves just one standing. And it is a non-fallacious one: the ability to run deficits lets politicians have the pleasure of spending (getting votes) without the pain of taxing (losing votes). Without that discipline, federal spending is out of control. On the other hand, a budget which must be balanced forces legislators to ask the necessary questions before embarking on new projects: Is it essential? Is it good for the country, for now and for the future: Should it be done by government or by the private sector?

One of the virtues of this book is that it sees government spending as a burden regardless of how it is financed. The author makes clear that whenever the government acquires resources that could be put to better use in the private sector, it makes at least some of us poorer. Moreover, when it uses resources for consumption that would otherwise have gone for investment, it reduces future production possibilities as well. This focus on spending as the burdensome aspect of deficits demonstrates the absurdity of fighting deficits through tax increases. Whether government finances resource acquisition through taxes, selling bonds in the open market, or selling those bonds to the central bank in exchange for newly created money merely determines which of us it makes poorer.

This redistributionist aspect seems to underlie most of the arguments regarding the deficit the author sees as fallacious. Indeed, it seems to me that one of his blind spots is the failure to see an economic or moral problem with using state power to redistribute income. This causes him to repeat an old falsehood about the deficit—that we owe it to ourselves. (The phrase smacks of Keynesianism at its worst.) While he does not let aggregation run amok to the point of suggesting that we and ourselves are the very same people, he does give short shrift to the disincentive effects that result from the higher taxes needed to repay the debt, including the interest on it. He also fails to recognize the injustice of making future taxpayers pay for current government spending. He perceptively notes that deficits cannot literally shift resources from the future to the present. But he fails to mention that deficits do create a two-way redistribution (of present resources from bondholders to taxpayers, and of future resources from taxpayers to bondholders), which makes it seem that way from the taxpayers’ viewpoint.

Still, for a man who spent his career in the government’s employ and probably learned his economics at a time when Keynesianism ruled the roost, Cavanaugh steers clear of many of Keynes’s pet notions. Thus, he denies in no uncertain terms that fiscal policy has any role to play in fine-tuning the economy. He also refutes the notion that full employment is necessary in order for government spending to crowd out private spending.

This is not to say that the author has completely risen above the conventional wisdom. He repeats the silly notions that the Fed is concerned with fighting inflation, that inflation is caused by increased economic activity, and that the American people collectively own the government. He also suggests that there is such a thing as government investments that actually pay for themselves (while this is not a logical impossibility, my guess is that it would be harder to find than kind words for socialism in The Freeman).

On balance, this book makes a valuable contribution to our understanding of a crucial subject. By shifting the emphasis from deficits to government spending as the problem, it should reduce the appeal of tax increases as a solution. Or at least it would in a more rational world.

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