Good and Bad Red Ink

I found this article over on Project Syndicate where Robert Skidelsky draws a distinction between when governments should borrow and when activity should be funded by taxes (emphasis mine):

Government deficits incurred on current spending for services or transfers are bad, because they produce no revenue and add to the national debt. Deficits resulting from capital spending, by contrast, are – or can be – good. If wisely administered, such spending produces a revenue stream that services and eventually extinguishes the debt; more importantly, it raises productivity, and thus improves a country's long-run growth potential.

Now by and large I think we can all agree with this fiscal philosophy. That being said it's the practice that I have a problem with. The crux of the issue here is on what governmental programs the electorate should be willing to go into debt for and which should be funded by taxation. Skikelsky rightly points out that there are two fundamental programs that the state should fund: Transfers (read: social programs) and Capital investments (read: transportation, education and the military). Now you could argue education is a social program given the level of influence the ERA has in the country but let's leave that aside for now.

Let's take Capital investments first:

Chief among these public works, for Smith, are those that "facilitate the commerce of any country, such as good roads, bridges, navigable canals, harbors, etc." Another piece of forgotten knowledge that Smith also mentions is the importance of education. He is right to do so, however much today's deficit hawks seem, by their behavior, to prove the opposite.

The liberals in this county argue that the government is not spending enough on these worthy public work projects. But it is my contention that it is not the amount of dollars allocated to these capital investments, rather, it is how they are allocated and who they are allocated too. For example Solyndra would fall under this category of capital investment (although some could argue it is a transfer program to Obama's cronies). This allocation of funds occurred with little or no oversight and effectively flushed a half a billion tax payer dollars down the drain. But the administration will argue that this is only one example out of hundreds and you've got to break a few eggs to make an omelet. But the real question is whether or not this project falls under the government's responsibility of capital investment in the first place.

My point here is that conservatives are not necessarily opposed to state sponsored capital investment but rather the level at which the state should be involved in the first place. Road - yes, navigable harbors - yes, bridges that actually connect two economic centers - again yes. To subsidize a company like Solyndra that NEVER had a chance to succeed in the market place?A resounding NO.

Right now, under the guise of capital investment, Jerry Brown is still advocating a $100 billion bullet train connecting Los Angeles and San Francisco that will never ever ever pay the taxpayers back.

So, is it ok for the state to go into debt on capital investments? The answer is of course yes if the project makes any sense. The problem we conservatives have is the lack of judicious judgment our collective elected officials have in dolling out those dollars.

Now to the transfer side of the state's responsibilities. These are of course the entitlement programs that are at their base wealth transfers. Now again, liberals will howl that those mean spirited conservatives would throw granny off the cliff if they had their way. So any attempt to overhaul Medicare and Social Security, both of which are increasingly becoming bankrupt, is met with political hyperbole forcing conservatives on the defensive. And now we increasingly have to borrow money to fund these transfers which should only be funded by taxes.

Each dollar we borrow to fund these non-capital expenditures exacerbate the problem further and every minute we postpone addressing the problem the worse the it will get for our children. So its not just that we currently do not draw enough tax dollars to support these non-capital programs, but we are borrowing to do it. And that, by the way, is how Greece got into its mess.

Again it's not the program that conservatives have a problem with it is the administration of the program and what its limits should be. This becomes harder and harder when you have less and less folks paying taxes.