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April 03, 2013 5:11 PM The False Premise At the Heart of the Balanced Budget Movement

By Ed Kilgore

There’s been lots of derision aimed at White House Communications Director Dan Pfeiffer for saying today that balanced budgets should not be an end in themselves. Matt Yglesias calmly explains why Pfeiffer is right, and moreover, why the contrary position is entirely alien to common experience:

If you want to see why, just consider that there is some level of government spending that you consider appropriate. Imagine that level of spending is achieved. Zero money is being spent on wasteful or useless programs, and no good spending is being forgone. We’re doing everything we ought to be doing. Now we need to finance that spending with some mixture of taxes and borrowing. The Cooper viewpoint is that it’s always the case that the optimal mix is 100 percent taxes and 0 percent borrowing. But why would that be? If the future is going to be richer than the present, there’s a strong prima facie case for borrowing. You don’t pay 100 percent cash for your house or your college tuition, and there’s no reason you should pay 100 percent cash for your national defense or vital infrastructure either. How much should you borrow? It has a lot to do with the interest rates. Not only is borrowing at a high interest rate expensive, but government borrowing at a high interest rates crowds out private capital investment. But if interest rates are low, then you don’t need to worry much about crowding out, and the economic burden of repaying the interest is likely lower than the economic burden of higher taxes.
So you borrow some money. Ronald Reagan did it. George W. Bush did it. Eric Cantor’s voted for a lot of deficit-increasing measures in his career.

But beyond that, as Yglesias’ explanation suggests, it’s not just governments that wisely borrow under the right circumstances: it’s the “regular families” who are presumably the target of all this hammer-headed “you have to balance your checkbook; why doesn’t government?” rhetoric. Unless the only people supposed to listen to this are older conservative “base” voters who have paid off their homes and their other major possessions and view anyone who hasn’t as shiftless, it’s not a real strong argument, or shouldn’t be.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • c u n d gulag on April 03, 2013 5:25 PM:

    My own personal favorite, is when I have to go the the dump for the town I live in, in Upstate NY (where every damn thing has to be seperated - OR ELSE!), and listen to the old men and women bitch about Obama's Socialism and Communism.

    Most times, I just sit there and take their ignorant abuse, but, every once in a while, I ask them, "Well, who has lived through the most 'Socialistic' period of America, than YOU?
    You still have pensions, you have SS, you have Medicare, and you're elibible for Medicaid. So, who has been the beneficiary of what you call, American Socialism,' more than YOU Socialists?"

    THAT, sometimes, STFU - but, sadly, not always...

  • Mimikatz on April 03, 2013 6:21 PM:

    Someone, I can't remember who, commented that because the US Gov't intends to outlive us all and last as long as possible, it is more like a corporation than a family. And corporations finance their operations with a combination of short term and long term debt. As do families, through use of credit cards, car loans, college loans and 30 year loans. But unlike a government or corporation, individuals die and may try to leave something to their progeny, or maybe not. In any event, few families are run as multiple-generational enterprises.

    The analogy misleads much more than it explains and Dems, including Obama, should just stop using it.

    Captcha: total peaceybe

  • jkl; on April 03, 2013 6:26 PM:

    I live in Pennsylvania where a Grover Norquist disciple governor has given a full green light to marcellus shale drilling, even on the top of a huge resevoir where multi-thousands of us homeowners derive our water for our homes.
    This is a good website, quite relevant to your points above, and there are "cool links" on the right that are absolutely informative. I could say scary in PA.

    http://marcelluseffect.blogspot.com/

  • more jkl; on April 03, 2013 6:50 PM:

    For New Yorkers I saw this on the marcellus effectHowever, the state might simply decide to monitor health impacts once fracking gets underway - a far cry from the health impact study that Assembly members and the public have called for since the beginning of the environmental review. Other states have already documented increased asthma rates and higher incidences of cardiovascular events. And two Pennsylvania healthcare systems, Guthrie and Geissinger, announced last month that they're teaming up to study the health impacts of Marcellus Shale drilling.

    'New Yorkers don't need a study that shows what happens when drilling occurs; we just have to look over the border to see that. Emergency services directors in Bradford and other PA counties have spoken numerous times about the increase in traffic accidents, delayed response times, emergency evacuations and other impacts.

    What we really need is a health impact study prior to drilling, something that would inform how - and whether - fracking happens--'

  • RaflW on April 03, 2013 8:36 PM:

    It misses the point more fundamentally:

    Families don't balance their books by not borrowing. They balance their books by clearing enough cash to make current payments.

    The point is to avoid default, ie: missed payments, not to be 100% debt free.

    Before families became over-leveraged and before their houses plunged in value, this made sense to most people. They'd borrow for a bulge in expenses like college or a new kitchen or a car.

    And families often use borrowing to make it through a lean year. Dad/mom lost a job? Take out a second mortgage, promise uncle Al that you'll give him 3 hamburgers later for one today, etc. Of course, if the income never comes back, there will be a reckoning.

    But in the current situation, we've decided that the reckoning happening right now to at least 3% and possibly as much as 18% of the work-age population is un/under employment in service to refusing to borrow to bridge the troubles.

    I can understand why some folks are suspicious as to wether the gov't will reduce borrowing if we dig out of the current mess. But it doesn't make sense to hobble the recovery and force more people into ruin - and require more automatic stabilizer payments, too (hey that creates debt too!) - out of a misapplied home economics principle.

  • paul on April 04, 2013 9:10 AM:

    And even if a balanced budget made sense (which it really doesn't for a government, for all the reasons people have already given) it's impossible to achieve in practice.

    Taxes and other revenues arrive in quarterly and annual chunks (mostly), and depend on economic conditions, the current creativity of accountants and the mix of activities that people engage in. Government expenditures go out in daily, weekly and monthly chunks, and depend on a combination of contracts and rule-based payments set by Congress.

    The likelihood that those numbers will match up exactly over the course of a year, much less on every given day: nil. So either there is always going to be some borrowing, or else the government is going to have to collect a few hundred billion extra in taxes for the first year or two of the plan, so that it will have a cushion. And invest that money in -- oh, wait, we have a balanced budget, so there's no borrowing, so there are no treasury bonds to invest it in. Hope the stock market isn't fluctuating.

    Then what actually happens if the numbers don't match? If there's a surplus, do we just cut checks and return the money (prorated by the taxes each person paid, or by the services they consumed, or as some flat number)? If there's a deficit, do we raise taxes or cut programs? What if (like all of Europe) we cut and that makes the problem worse the next year?

    Oh, and that's even before we get into accounting shenanigans like creating a company to perform certain tasks, using borrowed money and federal loan guarantees, which would be completely off the budget until it wasn't.

  • Wally on April 04, 2013 12:45 PM:

    When conservatives talk about debt as a percentage of GDP, I ask them about a guy making $50K who buys a $200K house with 20% down - which sounds like pretty basic, responsible personal finance to me. He has now taken on debt equaling more than 300% of his "GDP."