The following is a letter to the editor of The Pickens County Progress (weekly), Jasper, Georgia. The following definitions were not in the letter but are added here for clarification.
3/1/09 The Deficit! The DEFICIT! "The Federal budget should be balanced, like my family budget!" But government can only operate like a household in a couple of ways; mostly, government is so different in what it's supposed to do that there's no comparison. (1) I go into debt only to buy something that will be around at least as long as my payments on the debt (and will be within my ability to make the payments!). I borrow to buy a house -- a 30-year mortgage, because a house (properly maintained) should be in usable condition for at least that long. I take out a four-year loan so I can buy a new car. Middle-class families commonly take on these kinds of debt, as well as for appliances, furniture, and anything else that has a reasonably long life. Businesses borrow long-term to construct or expand buildings and to buy equipment. I go into debt for a short-term situation, such as major medical bills, but the outcome, restored health, is a long-term need. Similarly, paying in the short-term for college satisfies my long-term need to be economically viable. Government does the same. State and local governments, unlike the Federal government, have to balance their regular budgets each year, but all governments borrow long-term, by issuing bonds, paid off over many years, to pay for long-life items -- new roads, water supply or waste treatment plants, libraries, recreation centers, fire stations. It is fair and makes economic sense that citizens ten or twenty years from now will be paying off part of that debt as long as they're enjoying the long-term benefits of that spending. (2) I pay down existing debt as I take on new debt, since there's a limit on how high total debt payments can be as a percentage of my income. If my income goes up, the debt load I can safely carry also goes up. The Federal government has the same constraints, which is why periods of budget deficits occasionally are followed by periods of annual budget surpluses. Government debt, over the long term, should not exceed a certain percentage of GDP (a measure of the nation's income). Well, then, how is government different? (3) I have a limited life-span, so I'm expected to pay off my debts within my lifetime. But governments are perpetual, because there are always new citizens coming along who want its facilities and services. So government debt at SOME level never goes away—the National Debt will never go to zero, but it is turned over every few years; some debt is paid off, then new debt is incurred. When the Clinton administration started producing annual surpluses in its budgets, there was much wringing of hands in financial circles, fearing that the lowest-risk investments desired by many people, U.S. Treasury securities—which exist only because of Federal government borrowing—would dwindle and people would have no safe place to put their savings! (This problem was solved when the Bush administration decided that cutting taxes took priority over continuing to pay down the National Debt, and it thereby not only used up what had previously been budget surpluses but also cut Federal tax revenue for years to come and so added to the annual debt. The decision to start a war in Iraq but borrow, instead of tax, to pay for it assured many more years of debt.) (4) I should have emergency savings put aside in case of a lost job, severe illness, or other personal disaster. I need savings because, in an emergency, I probably can't borrow money (what bank will lend to someone without a job?). But government, because it's perpetual, doesn't have to have savings—it can borrow because it will always be around to collect taxes at some level to pay off the debt. (The only way government could acquire "savings" or long-term reserves is by collecting more taxes than it needs at the time—which taxpayers would not appreciate.) (5) There is another area of Federal government spending that doesn't compare to anything in a family budget: Dealing with the economic crisis requires taking on unusually large amounts of debt at one time—especially the $800 billion Troubled Assets Relief Program (TARP, better known as the Wall Street bailout, approved October 3, 2008) and the $787 billion American Recovery and Reinvestment Act (approved February 13, 2009). The way TARP was used under the previous administration is still controversial and subject to change, but both of these packages are intended (a) to stop so much additional damage to our economy that we descend into a deep and long decline, then (b) to shift our economy to deal with challenges that have been ignored for decades. While this additional Federal debt seems mind-numbing, it can be grasped when compared to the scale of the previous administration's annual Federal budget (about $3,000 billion, with an annual deficit of over $400 billion -- under pre-Obama accounting practices that your household definitely would not use). If these programs successfully prevent the worst potential damage to families' standard of living and restore the productivity of our economy years sooner than if we took no action, those amounts can be recovered through Federal revenues over a reasonable period of time. These two programs are similar, however, to going into debt for any other kind of long-term benefit—in this case, a restored economy in the shortest time possible. The Federal budget, in ordinary times, has some similarities to a household budget. But the Federal government must take a long-term view—it must maintain long-term economic stability and protect all households from national economic circumstances over which no single household, no matter how responsible, has any control. |