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Source link: http://archive.mises.org/14445/should-the-cost-of-war-include-interest-payments/

Should the Cost of War Include Interest Payments?

November 1, 2010 by

It is incredibly complicated to estimate the total “social cost” of a government policy. Ultimately, this difficulty stems from the fact that costs really only make sense in terms of an individual’s subjective preferences. In that respect, costs cannot be aggregated. FULL ARTICLE by Robert P. Murphy

{ 6 comments }

Allen Weingarten November 1, 2010 at 11:44 am

Am I missing something, or isn’t it evident that if one pays $100,000 for a house, it is less expensive than if he has a mortgage, where in real dollars over the years it costs say $250,000 ?
Is it not also clear that we lack the right to indebt an unborn generation with that cost?

Mashuri November 1, 2010 at 12:25 pm

That depends. In the former scenario, I’m paying $100,000 today, in 2010 money, all at once. In the latter, I’m ponying up $20,000 (for example) in 2010 money and gradually paying off the rest in later money. The value of the currency will likely depreciate over time and I also have $80,000 of left-over 2010 money to leverage or, if I only had $20,000 to start with, I was able to leverage my downpayment to get a home sooner than I otherwise could have. That value is highly subjective.

Allen Weingarten November 1, 2010 at 2:51 pm

Mashuri, I wrote “in real dollars” suggesting that the final payment of $250,000 was in terms of 2010 dollars. At any rate, isn’t it the case that whatever the advantage of having a mortgage, and no matter how the currency depreciates, the cost of borrowing the money will be less than the cost if it were paid off initially?

gene November 1, 2010 at 5:36 pm

The cost of paying off a house initially in cash is always lower than paying a mortgage over time, if you have the cash [or can use someone else's money for free or create your own]. If it wasn’t lower, banks wouldn’t buy houses and then collect the mortgage payments. They already have the money, why would they spend it in a way that would bring them less return over time?

Allen Weingarten November 2, 2010 at 2:52 am

Gene, thanks for a clear and brief proof.

tom November 2, 2010 at 5:20 am

Adam Smith in “The Wealth of Nations” had some ideas about the relationship between warfare and “welfare for the rentiers” (a.k.a. government debt)…

“The ordinary expense of the greater part of modern governments in time of peace being equal or nearly equal to their ordinary revenue, when war comes they are both unwilling and unable to increase their revenue in proportion to the increase of their expense. They are unwilling for fear of offending the people, who, by so great and so sudden an increase of taxes, would soon be disgusted with the war; and they are unable from not well knowing what taxes would be sufficient to produce the revenue wanted.

The facility of borrowing delivers them from the embarrassment which this fear and inability would otherwise occasion. By means of borrowing they are enabled, with a very moderate increase of taxes, to raise, from year to year, money sufficient for carrying on the war, and by the practice of perpetually funding they are enabled, with the smallest possible increase of taxes, to raise annually the largest possible sum of money. “

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