Saturday, January 26, 2013

Milton Friedman: government deficits as taxation and the unlikely event of government debt financed at a zero bound interest rate

"What we call a deficit is a form of taxation. It is a very bad form of taxation, but it is a form of taxation. However, it does have some good features. The deficit is the only thing that is keeping spending from going up even faster. Moreover, I do not know of any component of government expenditures that does less harm than the payment of interest. If interest rates tomorrow were zero so that government did not have to pay any interest, what would happen to the money it saved? Do you think it would reduce the deficit? You are kidding yourself." 

- Why Government is the Problem, Milton Friedman, Hoover Institute Press Publication, Essays in Public Policy No. 39, Q&A session, pg. 17

Guess what? Friedman's observation is spot on as interest rates are currently near zero and he predicted exactly what would happen.

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