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.
Updated June 24, 2016 and originally published April 18, 2011.