Paying down the debt too fast or too far could result in the deflationary effects on the economy due to the paradox of saving. A debt that grows too far or too fast, especially if held by foreign nationals, has the effect of weakening the dollar against foreign currencies and could potentially lead to hyperinflation and economic collapse. The budget deficits that are currently in effect are not a matter of how large they are, but are more a concern of what the money is spent on.
Spending more than the federal tax revenues take in has the capacity to fuel the economy or leave it in a state of debt with little or no return. For every tax dollar spent there is an opportunity cost. When tax dollars are borrowed to build roads or bridges, the money goes into the hands of employment and suppliers. This money is then recycled through the economy by the working class buying consumer goods. This stimulates the economy and provides jobs for autoworkers, carpet layers, and appliance salesmen who again recycle the money. However, if the money is spent on the design and testing of complex weapons system most of the money ends up draining the available pool of talented engineers and provides no commercial benefit (Nimroody and Hartung). Spending the money wisely can fuel the economy or be an opportunity lost.
While excessive government spending, and especially wasteful disregard, may seem to b...
He continues by saying that any interference by government is almost certain to be injurious to the invisible hand concept" (Palmer 22). From Smith's viewpoint of the invisible hand, all taxation contracts the economy, even when necessary. When the government runs up huge budget deficits, the invisible hand works to distort an otherwise healthy capitalist system and upsets the balance between supply, demand, buyers, and sellers.
In Adam Smith's ideal world where a perfect balance would be reached between buyers and sellers and an equilibrium price could be reached, there is little provision for public services. Smith could not have foreseen Social Security or Medicare that consumes a large portion of our government's spending. Yet, today's mixed economy demands a certain level of public welfare. While capitalism traditionally utilizes tax dollars on national defense and infrastructure, socialism is a service based spending. Given the choices, deficit spending under capitalism is more likely to create jobs and fuel the economy than social programs under socialistic regimes. The long-term commitments to the US Social Security and Medicare debt amount to over $50 trillion (Cauchon and Waggoner). Alan Greenspan has warned, "As a nation, we may have already made promises to coming generations of retirees that we will be unable to fulfill" and states that then consequences will be disastrous (qtd. In Cauchon and Waggoner). It is clear that the over-taxation to support socialism crushes the capitalistic economy.
While political promises to increase public welfare programs generates votes and may seem to be good politics, it is poor economics. In fact, the end result may be poor economics and poor government. It has been said in the past that