Posted on 02/11/2010 8:51:59 AM PST by SeekAndFind
Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household’s budget: “No household can continually spend more than its income, and neither can the federal government”. On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household. Let us enumerate some relevant differences.
1. The US federal government is 221 years old, if we date its birth to the adoption of the Constitution. Arguably, that is about as good a date as we can find, since the Constitution established a common market in the US, forbade states from interfering with interstate trade (for example, through taxation), gave to the federal government the power to levy and collect taxes, and reserved for the federal government the power to create money, to regulate its value, and to fix standards of weight and measurement-from whence our money of account, the dollar, comes. I don’t know any head of household with such an apparently indefinitely long lifespan. This might appear irrelevant, but it is not. When you die, your debts and assets need to be assumed and resolved. There is no “day of reckoning”, no final piper-paying date for the sovereign government. Nor do I know any household with the power to levy taxes, to give a name to — and issue — the currency we use, and to demand that those taxes are paid in the currency it issues.
2. With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.
3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. I don’t know of any case of a national depression caused by a household budget surplus.
4. The federal government is the issuer of our currency. Its IOUs are always accepted in payment. Government actually spends by crediting bank deposits (and credits the reserves of those banks); if you don’t want a bank deposit, government will give you cash; if you don’t want cash it will give you a treasury bond. People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government’s dollars. I wish my IOUs were so desirable. I don’t know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency. OK, some counterfeiters try, but they go to jail.
5. Some claim that if the government continues to run deficits, some day the dollar’s value will fall due to inflation; or its value will depreciate relative to foreign currencies. But only a moron would refuse to accept dollars today on the belief that at some unknown date in the hypothetical and distant future their value might be less than today’s value. If you have dollars you don’t want, please send them to me. Note that even if we accept that budget deficits can lead to currency devaluation, that is another obvious distinguishing characteristic: my household’s spending in excess of income won’t reduce the purchasing power of the dollar by any measurable amount.
If you put your mind to it, you will no doubt come up with other differences. I realize that distinguishing between a sovereign government and a household does not put to rest all deficit fears. But since this analogy is invoked so often, I hope that the next time you hear it used you will challenge the speaker to explain exactly why a government’s budget is like a household’s budget. If the speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a “sustainable” pattern?
I would have to ask why is the gvernment bankrupting our country, maybe they should be held to a higher standard, the household..
This one is setting off my BS meter.
Is this writer-clown serious?
Please keep the writer away from real life things, like science, engineering, etc.
Oh, he would make a good global warming expert.
Poorly reasoned article.
this is often a good tip-off :
“ ‘Professor’ of Economics “
and what moron would give this jack @$$ a degree in economics?!?@?
Krugman is making the same argument, yet when Bush was president and cut taxes he said the much smaller deficits would kill us. Those that want more government support deficits for that and eventual tax increases but not for tax cuts, and vice versa with tax cuts. I bet this guy is for tax increases.
This guy talks like we can avoid recessions forever.
If I buy an item from Cabela's in Nebraska, my state (Indiana) is going to levy sales tax on that purchase.
If this was all true, then the government could spend 100 times what they are now and everything would be better.
Too educated for his own good?
Does the learned professor understand that at some point the accumulated debt will have to be paid off and that simply printing additional dollars will devalue the currency?
Typical Keynesian.
And here’s reason number 6:
Eventually you can tell your deadbeat son-in-law to get off your couch and go get a job, otherwise he doesn’t eat at your table and can leave your house. You don’t care whether he votes for you.
He’s got some minor valid points, but his presentation is just ludicrous. True, no private household lasts for 230 years (although private corporations do), but that does not mean the comparison is invalid. The point is the same: spending more than you take in is a horribly stupid idea in the long term. Putting it in household budget terms helps Joe Sixpack and Sally Seamstress to understand how grotesque the situation is, even though they have literally trillions to spend.
The author missed one.
The Great Depression so poisoned the word "depression" that every economic drop since then has been merely called a "recession". It's like saying "passed away" instead of "died". The result is still a burial.
Now with that being said, find any surpluses before the recessions of the last 60 years of the 20th century.
That's exactly what happens though. People stop accepting worthless currency and ask for hard currency - or gold. Legal Tender laws make this difficult for shopkeepers - but the rest of us will start making dollar-less deals if and when the dollar becomes a wheelbarrow currency.
There is nothing hypothetical or distant about the moment when America's debt service passes its one-year assets. It's what, two years off? The only variable is how mangy the other world economies will look in comparison at that time.
For instance, we in the UK will get to technical sovereign default before the US. And Greece got there ages ago - however they can't devalue their currency - so I imagine that the entire Eurozone will take the hit. And if the Eurozone crashes then the Pound will miraculously become the tallest pygmy in Europe.
Glad I didn’t go to UMKC for my Econ degree.
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