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The Budget Deficit and Debt: Is the Government Like a Household?

This article was written by in Economy. 14 comments.


Financial experts tell families to “spend less than they earn” and “don’t pay interest to borrow money.” The government does the opposite, running a budget deficit and paying billions of taxpayer dollars every year in interest payments. There is no question that deficit spending by the federal government is a problem. Or is there?

There’s a popular analogy that likens the government to a household. Deficit spending, where a budget calls for spending more than it has available, is a sure way to increase debt. For a household, debt can be most dangerous, resulting in financial disaster in the worst case. Although the analogy can be nice and neat, it’s not very accurate. Here’s what Philip Greenspun had to say recently about how the government’s deficit would look if we were talking about a household rather than the single most important part of the economy right now:

Let’s start with federal spending. The FY 2011 federal budget is approximately $3.82 trillion… We have a family that is spending $38,200 per year. The family’s income is $21,700 per year. The family adds $16,500 in credit card debt every year in order to pay its bills. After a long and difficult debate among family members, keeping in mind that it was not going to be possible to borrow $16,500 every year forever, the parents and children agreed that a $380/year premium cable subscription could be terminated. So now the family will have to borrow only $16,120 per year.

There’s a good point in here. If the goal of lawmakers right now is to cut the deficit, tackling the smaller numbers is just noise without overall effect, like the household canceling the cable subscription, while the larger expenditures go mostly untouched. Great job: you canceled the dollar-a-day cable service but are ignoring Johnny’s $1,000-a-day compulsion (Fabergé egg collecting, naturally).

Never mind the details; it comes down to whether the government really is like a household. Here’s why it’s not at all akin to a family spending more than it earns.

  • The government can at any time, at its discretion, increase revenue. It’s not popular, but raising taxes is an option. Households cannot similarly decree that their income increase. People can take certain actions to increase their income, like obtaining more education or training, but these often require even more expenditures. Income-earners can get second or third jobs to help make ends meet, and the farther that goes, it will be emotionally, mentally and emotionally straining on a family.

    Households are not nearly as flexible on the revenue side as the government. Thanks goes to interim podcast producer Bryan J Busch for the reminder about this point.

  • The government can at any time, at its discretion, devalue its debt. Monetary policy comes into play. The Federal Reserve, working alongside the government, purchases government securities, increasing the money supply for banks and consumers. With more money available in the economy, people (but mostly businesses) can afford to pay more, and prices increase, effectively decreasing the purchasing power of a dollar. This is a great position for people who owe money to be in, because the real value of what they owe decreases.

    Households, on the other hand, have no control over the money supply and therefore cannot manipulate the real value of their debt.

  • Deficit spending helps spur the economy. Throughout the twentieth century, the government was more frequently in a budget deficit than in a budget surplus. The ability for the government to spend freely helped this country become the rich economic powerhouse it is today. With the federal government taking up the slack by investing in the economy during periods in which businesses were gun-shy, the country continued prospering — particularly the middle class. Periods of deficit spending were followed by periods of surplus, but for the most part, deficit spending is linked to this country’s growth.

I’m not intending to defend the concept of deficit spending. Over time, it will cause problems. Interest on debt is one of the largest national expenses, and having to continually pay for expenses already incurred is not a “wise” expense. Even through the devaluation of currency, it’s unlikely this problem will ever be tackled. Unlike a household, though, government can keep postponing the consequences. The best a household can do would be to declare bankruptcy. Other nations have taken this approach to have an opportunity to restructure their debt, but it’s unlikely for this tactic to be used the United States in the near future — unless Donald Trump is elected President; he has some experience with bankruptcies.

Published or updated April 17, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 14 comments… read them below or add one }

avatar wylerassociate ♦162 (Cent)

as far as america’s debt crisis is concerned, it’s foolish to have the declining middle class pay the brunt of expenses and taxes while military/defense spending increases. That has to change going forward in this country.

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avatar skylog ♦368 (Nickel)

agreed. any discussion that does not include medicare, medicaid, social security (a problem eventually) and defense is a waste of time. while i agree that the upper class needs to step up, i do also feel that the real solutions to the problem will also include more sacrifice from the middle class. as a member of said class, i wish it were not this way.

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avatar Ken Faulkenberry

I would like to add one point and agrue against one you have:
Add: The government is an ongoing entity (hopefully). A house hold has different stages of life and theorically should be reducing (eliminating) debt as they get closer to retirement. The government has no such cycle.
Against: I have a problem with “deficit spending helps the economy” concept. This is Keynesian economics and has largely been discredited. While some government spending may be stimulative, much of it it wasteful and harmful to the economy. The Obama stimulus plan (all borrowed money) has provided only mild stimulus, certainly not a enough “bang for the buck” to warrant mortgaging our future for.
Thank you for letting me voice my opinion.

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avatar Pat S.

I like this article comparing the government to a household. I think it brings it home for most of us.

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avatar Ceecee ♦53 (Newbie)

Very interesting take on the national deficit and debt. I hadn’t thought of those other considerations. And touche to “The Donald!”

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avatar SteveDH

The government cannot keep postponing the consequences! Even now China is deliberately trying to increase the holding of their currency worldwide – and they are succeeding. Once the dollar sinks and another currency becomes the “reserve currency” of choice, the American dollar will be as irrelevant as the Canadian loonies. Although Canadian debt is still purchased by many, it’s not purchased with the enthusiasm and in the quantity of US debt. Although I don’t believe the “Sky will fall, stars won’t twinkle, and the Cubs will win the series” from this administration, limiting debt, even by refusing to raise the ceiling, has to become a reality, if not now, soon!
By the way have you noticed the polite way mainstream media are avoid the obvious? They have a new term “Bush era Tax cuts for the rich”. Seems to me that if Bush signed the tax cuts and Obama extended them they should be called the Bush-Obama tax cuts for the rich? They are part owners now….I’m just saying…..

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avatar tbork84 ♦1,867 (Half-Dollar)

Its an interesting comparison. I am glad that you point out that its akin to comparing apples and oranges though. That being said, there is a real and present problem of financial structure in the country, and as S&P has not pointed out, little being done to actually solve the problem from either side of the aisle.

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avatar Apex ♦478 (Nickel)

Your distinctions between the govt and a household are valid (although I will agree with Ken that the stimulus distinction is a political one which creates polarizing disagreement).

However there are many ways they are still similar.

The way the govt is like a household is politicians and those who vote for them (mostly those who vote for them cause the pols just do what will get them re-elected), want to spend far more than they take in. This is exactly what has been happening to households for the past few decades, right in line with the govt. The other way that the govt is like a household is if the imbalance is kept to a moderate amount of a growing income, it can continue forever (assuming the income continues and grows forever). And the other way they are also alike is that if the imbalance is growing considerably faster than the income is growing there will definitely need to be a time to pay the piper.

The differences are in how you pay the piper but in the end those pretty much result in the same thing too, sticking someone else with your bill.

So if you are a household, you got to consume for all those years, you enjoyed that consumption and then you are already broke financially so you just declare bankruptcy, take that hit to your credit and ability to borrow for the near future and you stick your creditors. They pay your bill.

If you are the government, then the citizens got to consume for all those years, enjoyed that extra consumption (be it in roads, schools, social security, medicare, welfare, military (wars) etc … some people may not feel they enjoyed it but someone was benefiting) and then either the government raises taxes or devalues the currency (inflate the debt away). You stick future generations of tax payers with your bill or you stick cash and debt holders of the U.S. with your bill by devaluing the asset and cash they hold and making everything they have to buy more expensive.

The household will be sticking banks and other businesses with their bill. For the most part, nameless faceless presumed “richies” with your bill.

The govt will stick future generations with the bill (and they will pay it, eventually it will be paid through higher taxes or devaluing what they have). So in the most perverse sense, when we vote for the govt to “do the right thing” and “take care of group X” we are saying we want our kids to pay for our consumption.

Sticking other people with your bill is not a good plan, but planning to do it to your own posterity? This is a rather selfish and heartless thing to do. How can this be? Ah, because no one really thinks they are doing that. Why? Same reason they are not afraid to declare bankruptcy, they think the “richies” are going to pay. But when the govt has to deal with its imbalance, it will not be the “richies” that pay, it will be everyone. Look at Europe and see the riots, it aint the “richies”

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avatar Josh

“Deficit spending helps spur the economy.” Wow! This wasn’t true during the Great Depression, and it’s not true now. It’s been completely discredited, but Keynes’ disciples seem to be immune to facts.

Raising taxes, as has also been proven, harms the economy and the taxpayer.

Devaluing debt, like raising taxes, both harms the economy and the taxpayer. I’m not talking about low, stable inflation (~3%), but the kind of inflation we would need to really devalue our debt.

So really, when it comes down to it, we should stop spending so much money. If the government behaved more like a household, we would not be in this mess.

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avatar Bryan J Busch ♦452 (Nickel)

Please include links to reports by objective observers regarding the complete discrediting of Keynesian economics you mention, and to the proof that raising taxes (I assume you mean raising any kind of tax on any kind of person) is harmful to the economy.

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avatar Josh

I find it incredibly odd that you are requesting links from so-called “objective observers,” but I will take the time to provide some good links on the topics I mentioned. In taking this time, I’ll assume that once I provide some links for you, you’ll take them seriously. I’m certain you’re familiar with the massive growth exhibited by our economy after tax cuts made by Presidents Clinton, Reagan, and Kennedy. I also see no need to discuss the anemic growth seen in economies in which the gov’t consumes a larger share of GDP than in the US. It’s good to start by focusing on the topic of Keynesian models.

I take it from your not mentioning it that you are in agreement that high inflation is bad for the economy and taxpayers, so I’ll leave that alone.

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avatar Josh

Keith Hennessey explains the different camps on fiscal stimulus. There is no opinion or research here. It just gives the spectrum of opinion on fiscal stimulus.
http://keithhennessey.com/2010/06/28/fiscal-stimulus-camps/

Greg Mankiw helps frame the discussion of Keynesian theory and notes some important figures of Keynesian multipliers. A government spending multiplier of 1.4 is given for the US, while Christina and David Romer did a study showing a tax cut multiplier of 3. Textbook Keynesians typically assume a tax cut multiplier of about 1 and a government spending multiplier of about 1.5.
http://www.nytimes.com/2009/01/11/business/economy/11view.html

Two econ professors think FDR’s policies prolonged the Great Depression by seven years.
http://online.wsj.com/article/SB123353276749137485.html

An in-depth study of government spending Keynesian multipliers in the new models compared with the old: http://www.volkerwieland.com/docs/CCTW%20Mar%202.pdf
This does not bode well for those who think government spending helps the economy.

John Taylor’s comments from last year’s NBER Macro meeting are here: http://www.stanford.edu/~johntayl/NBERMacroAnnualTalkFinal.pdf
John Taylor (developed the Taylor rule) is possibly the leading voice for rules based monetary policy. Here he discusses some deviations from rules based policy that he believes were detrimental.

There are plenty of economists who wrote much longer works, including Milton Friedman, F.A. Hayek, Murray Rothbard, Henry Hazlitt, and Ludwig von Mises, to name a few. Bastiat’s writing of the “broken window fallacy” is the earliest I know of to refute Keynesian thinking.

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avatar ethan rittershaus

Bringing up the parable of the broken window (as its known by people that actually bothered to read That Which is Seen and That Which is Unseen) already diminishes your credibility. The true fallacy of your statement is to equate destruction such as breaking windows with the natural process of entropy and decay or depreciation. Projects targeting infrastructure (which is quite litterally falling apart in this country) are not a waste of money nor are they destructive. Quoting Austrian economists isn’t going to get you anywhere either as what they really did was a breathtaking cutting edge analysis of the business cycle which then sent them running because the conclusions actually indicated that the markets were inefficient which was apparently too much for their ideology to handle. Also grouping Milton Friedman with Rothbard and Mises is simply insulting to Milton Friedman.
Cheers

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avatar Cejay ♦1,521 (Half-Dollar)

I think the government needs to be run a little more like a household. It scares me to think of my nieces and nephews and the debt they are saddled with. I am also scared at the thought of what my future will be if things do not change.

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