Another alternative for financing government is to increase the money supply. Our government has been fairly disciplined about resorting to the money-supply option in recent years, which is the main reason why inflation has been relatively mild. Over one-fifth of total U.S. expenditures are made by the federal government. Under the best of conditions, the decision-making process of the federal government is cumbersome and inefficient. When the true costs are systematically distorted, the damage is major.
Voters base their electoral decisions on distorted information.
Obviously, making rational choices would be almost impossible. It used to be argued that occasional deficits were a good way to stimulate the economy, but there are fewer and fewer adherents to that theory. In any case, even that line of reasoning never advocated the kind of perennial deficits we've experienced in the past several years. Advocates of a balanced budget often argue that it will reduce interest rates. Although that certainly seems probable, the historical relationship between deficits and interest rates is inconsistent.