Cantor Spokesman Wrong on Budget

A blog about business and economics.
April 3 2013 11:46 AM

You Don't Want to Balance the Budget for the Sake of Balancing the Budget

balanc

A remarkable series of tweets Obviously, Dan Pfeiffer is correct about this.

If you want to see why, just consider that there is some level of government spending that you consider appropriate. Imagine that level of spending is achieved. Zero money is being spent on wasteful or useless programs, and no good spending is being forgone. We're doing everything we ought to be doing. Now we need to finance that spending with some mixture of taxes and borrowing. The Cooper viewpoint is that it's always the case that the optimal mix is 100 percent taxes and 0 percent borrowing. But why would that be? If the future is going to be richer than the present, there's a strong prima facie case for borrowing. You don't pay 100 percent cash for your house or your college tuition, and there's no reason you should pay 100 percent cash for your national defense or vital infrastructure either. How much should you borrow? It has a lot to do with the interest rates. Not only is borrowing at a high interest rate expensive, but government borrowing at a high interest rates crowds out private capital investment. But if interest rates are low, then you don't need to worry much about crowding out, and the economic burden of repaying the interest is likely lower than the economic burden of higher taxes.

So you borrow some money. Ronald Reagan did it. George W. Bush did it. Eric Cantor's voted for a lot of deficit-increasing measures in his career. So say that balancing the budget for its own sake is a good idea?

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.