Federal spending: It's simple, stupid [Most commented]
Will the growing deficit actually help us on our way to economic recovery? That’s the point economist Bill Craighead makes in a Wednesday Op-Ed, in which he challenges the politicians who compare the federal budget to that of a household.
Politicians of both parties have furthered the misunderstanding by frequently drawing an analogy between the federal budget and household budgets. "Families across this country understand what it takes to manage a budget," President Obama declared in a February radio broadcast. "Well, it's time Washington acted as responsibly as our families do." While this comparison appeals to a general belief that we should "live within our means," it's also misleading.
Decisions about the federal budget are fundamentally different from those of individual households, because policymakers need to account for how their choices affect the economy as a whole. It is more appropriate to liken government budget deficits to prescription medicine. Just as medication can be helpful to a sick patient, deficits can aid a failing economy. […]
To stabilize the economy, the federal government needs to counterbalance the swings in consumer and business expenditures by moving in the opposite direction. When consumers and firms cut back, government can help replace the lost economic activity through direct spending (on infrastructure projects, for example) and through indirect means, such as tax cuts, which increase households' disposable income. […]
In short, the fact that the government is taking in less in tax revenue than it is spending is helping, not hurting, the economy. Immediate large spending cuts or tax increases to close the budget gap would be a severe blow to an already weak recovery.
Many readers on our discussion board aren’t buying Craighead’s argument.
Craighead is preaching to the choir
The author is completely correct, and anyone who actually understood macroeconomics in college knows it. But he is preaching to the choir.
The people who need to know what the author is talking about are loudmouthed Fox shouters who are deacons in the Church of Stupid, and will never listen.
Craighead’s argument is logical, but incomplete
I have several problems with this essay. It's a nice logical argument but it's incomplete and one sided.
The major thing missing is a discussion about limits on the debt a government can sustain. The false assumption inherent in this argument is that the capacity to borrow is unlimited. With a national debt close to 100% GDP we fast approaching the levels of European nations with a sovereign debt crisis.
Next, i think the problem with the previous stimulus was more its form than its size. At over $1.5 Trillion or close to 10% of GDP it's a pretty big stimulus but most of went to letting states like California delay tough decisions, or supporting public union jobs (shovel ready), or demand shifting (buy a house or a car now before the incentives expire). Something targeted more at private sector jobs would have been better.
The part about "The U.S. economy slumped largely because of a reduction in spending by households and businesses" ignores the cause of the reduction which was the credit crisis caused by wover-leveraging by big investment companies. In other words too much debt. Lehman Bros was leveraged over 32:1, so a 3% drop in their investments wiped out all their equity.
Yes a government budget is different than a household budget but that doesn't mean they have nothing in common. Neither has unlimited credit and sooner or later both have to pay the piper.
The federal budget vs. household budget
The difference between the federal budget and a household budget is that a household can be much more responsive. Many of us earn a income from one or two sources, and it is easy to adjust our spending, depending on what we earn. The federal government receives money from 100 million households in the US (just a rough guess), and it is simply slow to adjust to declining incomes. The legislative process of making decisions that affect the budget creates a long lag time between the money that comes in, and the spending that occurs. If the federal government learned how to save during the good times, it could mitigate this re-adjustment lag time.
It’s simple, stupid
If one takes the time and trouble to actually read what Keynes wrote and what some of his responsible students wrote, one can make the case that he did view the budget of the federal government in terms quite similar to a household budget. Simply put, in normal or good times, one put something aside for a rainy day and in bad times one uses these savings to get through the bad times. For example, in 2004 I had a serious health issue and did not work for a number of months. I dipped into my savings and when I went back to work I started to replenish my savings. In good times the government should save money and not spend every penny and then some so that when a rainy day comes along it has money to help the nation get through the bad times. This author should sit down and read Keynes and one should realize that politicians and their spending habits are a problem in good times and bad times.
The government is like a welfare recipient
This is true. Government is not as much like a household as they are like a welfare recipient.
Government has only one source of moola - the money taxpayers GIVE the IRS.
Most homes not on welfare these days are two-income households - if both partners are lucky enough to have jobs or businesses they have kept going. In other words, we taxpayers work for a living and the government takes that money and spends it how they see fit. Sounds like welfare to me.
Photo: A warning sign at a traffic signal post near the Capitol dome in Washington on July 29. Credit: Jewel Samad / AFP / Getty Images