Three Ways Government Spending Is Ripping Us Off
Authored by Cipriano Lemmo via The Mises Institute,
For many decades the United States and almost every other country in the world have been haunted by fiscal deficits; however, normal people do not seem to realize how it can affect their lives and their well-being. Many people around the world simply do not care about how the fiscal policy of their respective country is and the governments use that lack of interest to advance their monstrous deficits.
The problem seems to be that people do not think that government spending is related to them in any way.
Nonetheless, it is easy to demonstrate how deficits not only affect our lives but also are making us poorer.
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The first thing to know about government spending is that it’s financed by the taxpayers' dollars, so every time the deficit grows, the state is going to take more and more of our money in order to cover that. There are three ways that the bureaucrats steal from us to finance their populist measures, and those are taxes, debt (which counts as future taxes), and inflation. In the following paragraphs I will detail how each one of these works and show that everyone should be paying attention to what the government is spending. When the government chooses taxes as a way to finance their spending, it is easy to notice how that would have a terrible outcome for the entire economy. The state would take money away from the productive members of society, who are, of course, individuals and companies, translating to less savings, less investments, and less growth. As a consequence of smaller economic growth we get a poorer society and less well-being. The graphic below shows the relation between government spending and taxation since 1900 in the United States.
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Another option that governments often use and is significantly more popular than taxation is debt. The state borrows money from other countries or from private banks in order to pay the fiscal deficit; however, the debt does not magically disappear. The only difference between deficit and debt is that the second one is going to be paid in the future and it will have interest. Therefore, the debt is only making future administrations and future unborn humans pay for the current indecent spending. This means that future generations of individuals will be taxed by future administrations to pay for past fiscal deficits. Debt is more than just a loan, it is future taxation, it is taxation without representation (because many of those who are going to pay are not born yet) and it is, without a doubt, immoral.
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Finally, the last resource available for the government to pay for the fiscal deficit and destroy the taxpayers' savings is inflation, which is probably the most secret and destructive of the three options. This last tool used by politicians does not only involve the federal government, but it also involves the Federal Reserve in the United States and the central banks in other countries, because the government can decide to pay the deficit by using newly printed money. Of course, this is more common in countries where the central bank is directly dependent on the federal government. If the state and central bank decide to print money to cover the deficit, it will create the known phenomenon of inflation, whose consequences we all know are higher prices, loss of purchasing power, depreciation of savings, and more. The state destroys our currency to finance its colossal spending, and as if that were not enough, it mandates citizens to keep using the same devalued money.
Each of these three ways for the government to pay for the fiscal deficit are already bad separately, but unfortunately, the state does not limit itself to one of these measures at the time but applies all of them at the same time and, as everyone can imagine, we have an economic disaster. Although we can see these kinds of criminal policies being applied almost everywhere, we need to take a special look at the states who practice them at the most extreme level, and a great example is Argentina, which had a deficit of 8.87 percent of gross domestic product (GDP) in 2020 and a debt of 102 percent of the GDP. The results are an inflation rate of 36.10 percent, a 42.00 percent poverty rate, a 10.50 percent rate of extreme poverty, and an unemployment rate of 11.67 percent in 2020. In other words, Argentina is complete and utter chaos, and it should serve as a lesson to every country around the world.
Control the government spending or suffer the sad and inevitable consequences of disastrous policies.
Argentina: A Case Study
The Argentinian government has applied this recipe of high spending and huge debts for almost a century; however, to understand how the country reached the numbers mentioned before we should take a look at the last two decades of economic policy, specifically from 2001 to 2020. In 2001 Argentina had the biggest crisis of its history. The president resigned and a transitional government was put in place until the 2003 election. By the year of the election, the economy was naturally recovering from the crisis on its own, the GDP had grown 8.8 percent after dropping 10.9 percent two years before, Argentina had reached a surplus of 0.5 percent, and inflation was around 3.7 percent. This natural recovery (growth in the GDP, fiscal surplus, and one-digit inflation) kept happening; however, the new elected president, Nestor Kirchner (left-wing), was taking credit for it, and his government started to spend more and increase the size of the state.
After Nestor left office in 2007, his wife, Cristina Kirchner, followed her husband’s policies and went even further: she nationalized several companies and expanded social programs. This caused the public spending to increase from 28.7 percent in 2007 to 42.2 percent in 2015. The debt increased (in absolute values) from more than $165 billion to more than $240 billion, and the inflation went from 8.83 percent in 2007 to 10.62 percent in 2013. In 2015 the Kirchner era ended, and the new president, Mauricio Macri, claimed he would solve Argentina’s problems; however, he was more of the same and kept applying the economic policies of the Kirchners. The bad economic policies of the last government therefore continued, and this added to the inability of the new government to implement reforms. As everyone would expect, the results were even worse under Macri’s administration, because although he applied the same Keynesian policies, the country was already broken, in contrast with when the Kirchners took power.
In Mauricio Macri’s final year, we had 53.55 percent inflation, a deficit of 36.1 percent and a debt of more than $323 billion dollars (88.8 percent of the GDP). Now Cristina Kirchner has come back to power as vice president and obviously nothing has changed. If Argentina keeps going down the same path, with bigger deficits financed with higher taxes, bigger debt, and higher inflation, the outcome will be more poverty, more unemployment, and less well-being. Argentina is a most extreme case of what huge government deficits can cause, and its case shows why every citizen should hold the state accountable and pay attention to public spending. In the end, the people end up paying for the government’s immense bill with inflation, taxes, and poverty.
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