Is Balancing The Budget Conservative?

This question fascinates me. Traditional conservatism always made much of avoiding deficit spending (if more in the breach than the observance). But is a balanced budget, ceteris paribus, conservative? I say no, as this September 2004 comment at BrothersJudd argues:

There is a theoretical tendency for deficits to raise interest rates. In practice, it is such a small effect that it has always been swamped by other things happening in the economy. Deficit spending and a national debt at the level we are experiencing, and even much higher, are not correlated with any adverse monetary consequence.

Having said that, deficits can be politically debilitating because they allow the illusion that everyone can get more from government than they put in. All other things equal, that is bad for conservatism, one of the tenets of which is that activist government is a wealth destroyer. All other things are never equal, however, and deficits, in and of themselves, are not, ipso facto, bad government but simply a proxy for bad government.

In other words, arguing against deficits is a convenient tool to use to beat at government spending that we don't like. This program, or that, we argue, are not worth the debt it takes to finance them. There is, though, a flaw at the heart of this argument that has led many so-called "fiscal conservatives" astray. Conservatives are mislead into thinking that it is the debt, rather than the program, that is the problem.

This is clearly wrong. If the government borrows money from me, that is a voluntary transaction in which the government pays me for the use of my money and thus faces more of the real cost of the program. If the government taxes me, then I bear the loss of the foregone interest (and must borrow more myself, or reduce my personal spending, or fail to make an investment) and the government does not see the real cost of its program. (This, of course, assumes, contra factually, that the government even engages in quasi-cost/benefit, return-on-investment analysis, but that doesn't effect the argument.) In fact, for the finance students among us, I would argue that there is a Miller-Modigliani corollary for government that says that, just as debt and equity financing is the same for a corporation, there is no reason to prefer taxation to debt for financing government programs.

In other words, if a government program is not worth borrowing for, it is not worth taxing for. The conservative response to a bad program is to close down the program, not to raise taxes -- and if a good program requires borrowing, then passing it by to avoid borrowing is nuts.

So, the president's various programs may or may not be good ideas. I like more than I dislike. But the fact that we are borrowing money to pay for them (notice that same assumption) is irrelevant. (If we relax the assumption, we know in practice that if the government weren't spending the money on Iraq and NCLB and prescriptions, it would just be spending it on something else. If the money's going to be spend anyway, I'd rather have it spend on President Bush's priorities than John Kerry's.)

John Kerry provides the perfect example of what I'm talking about. Senator Kerry voted for the $86 billion to fund the Iraqi war before he voted against it. The reason he voted against it was the Senate's rejection of his amendment to raise taxes (he would say "reverse" some of the president's tax cuts) in order to pay for the war. Here, Kerry is at least purporting to believe that, while the war is worth risking American lives, it isn't worth issuing government bonds. Whatever that argument is, it sure ain't conservative.

From a following comment:

Let's try this a different way: No cost is too great for the essential functions of government; no cost is so small that we should accept unnecessary government. We need to win the argument about the proper functions of government, not hide behind arguments about the cost.