Keynes, Keynes, Keynes

      3 Comments on Keynes, Keynes, Keynes

So. Jamelle Bouie over at TAPped wrote a pretty good note called Why Balance the Budget? It’s carrying on from Matt Yglesias over at Slate who asks Why Would You Want To Balance the Budget in 10 Years? (which is a response to Larry Summers in the Washington Post writing America’s deficits: The problem is more than fiscal). Both excellent questions, when applied to our federal government. Now, I have often grumbled a bit to myself about a thing that comes up often in discussing the federal deficit or debt that Mr. Bouie does: he says The government isn’t a household and therefore you don’t have to balance your budget the way a household does. But he doesn’t—and people rarely do—explain what the differences are between a government budget and a household budget that specifically apply to this case. And I was going over them and thinking about writing a note about them when I realized that when it gets down to it, this argument that households ought to balance their budgets is not very convincing. Take a deficit of, oh, 2% of the household revenue? For that $50,000 household, that’s a thousand bucks on the credit card at the end of the year. That’s not a disaster, is it?

Digression:It’s actually really important, in thinking about household budgets, to realize that for people who purchase houses or cars, their debt is likely many times their revenue. We, for instance, borrowed five times our annual revenue when we purchased a house. We’re paying it back, month by month; I have no idea what it would mean to “balance” our household budget while ignoring that. This is another way in which the federal government is different from most households: it has paid off its first mortgage. On the other hand, you don’t have to own a home, so looking at a household that rents and uses public transportation is more likely to be helpful in this comparison. End Digression.

So. If a household makes $50K and spends $51K, in our world, they are likely to be doing just fine after a year. After seven years, if you’re getting somewhat decent annual raises, you’re making nearly $60 and spending about $61,200—you’ll have a credit card balance of just over $7500, and you’ll be right around the average household credit card debt in this country. Visa ain’t gonna cut you off at this point, you know? Still, it can’t go on forever, right? Probably only for, oh, ten years? Fifteen years? Between when you are thirty and forty-five? So the question is, how bad is it to hit forty-five with no savings and a debt of just over 10% of your income?

The answer is—well, it’s not great, but it’s not all that bad. The fifteen grand is costing you (mostly because if it really is credit card debt, you’re paying something like three percent of your income in debt service—that’s a grand a year you could be spending on hookers and blow, you know) but it isn’t in itself going to destroy your life. As long as the credit cards will keep giving you credit—which as long you have a good income and pay that minimum balance could be forever—you could keep on going, paying out a trifle more than you take in, until—well, that’s the thing, isn’t it?

Pretty much there are three things that can happen to you, in the long run. One is that your revenue will eventually decrease—you’ll have to retire. If you’re lucky. If not, you’ll laid off, or you’ll get hurt, or you’ll have to take a pay cut, or your income won’t keep pace with inflation. Something like that, if you live long enough, will eventually happen, and that’s when all that debt will come back and bite you in the ass.

The second thing that might happen is death. Possibly early death, in which case the unbalanced budget will never hurt you at all! Oh the other hand, perhaps early death isn’t the most positive outcome… still and all, it’ll happen sometime. So that’s one on the don’t worry about your household deficit front against the first it’s bound to bite you one.

The third thing isn’t as definite as the first two. I mean, you’re bound to die, eventually, and if your revenue hasn’t decreased by that time, it’s going to pretty much stop right then. But the third one, which might not happen at all, is that you might have a child. And that, well, that changes everything. All the risks, all the rewards, all the things you might save up for, all the dangers to be avoided. Everything.

But… nations don’t have children to provide for. Nations don’t die. And while it’s true that even nations sometimes have their income temporarily drop, they don’t retire. So when we say that the nation isn’t a household, what we mean at the very least is this: nations don’t die, nations don’t retire, and nations don’t breed. And, sure, nations can print their own money and invade other nations and impose tariffs at the borders and so on—really, there aren’t very many ways in which a nation is like a household. And as I hinted at in the digression above, an annual Balanced Budget rule would be a nonsensical idea for households anyway, if you are counting houses and cars and such. But it really, really, really is a nonsensical idea for governments.

And even for households… well, I’m not saying I would advise you to spend more than you take in, but I’m saying that the arguments against it are long-term arguments. You should be thinking long-term, of course, but that’s every bit as true about diet and exercise and all that cal as it is about deficit spending.

Tolerabimus quod tolerare debemus,

3 thoughts on “Keynes, Keynes, Keynes

  1. Chaos

    Hmm. Maybe… but it’s not just children, is it? It’s the flexibility to go off and do something totally different. So, for you, maybe that’s have a child, at which point their finances get tied to your finances (among other things), and it’s all complicated. But maybe i want to quit my job so that i can start my own business, or so that i can pack up and move to Nepal. Then the equation is different — my debt isn’t catching up with me because i had bad luck, my debt is catching up with me in that it’s constraining me from doing something i want to do.

    I think that one translates better. A government might not want to have children, but a government might want to go to space or build an interstate highway system or invest in sustainable urban development or buy hundreds of millions of chickens and pots for its citizens (err, making the assumption that that slogan dates from days when Americans could be more reliably assumed to own large stockpots…), or whatever. And, if we’re just making a lifestyle-based argument, a government which was already running a deficit might feel constrained from doing those things. No?

  2. irilyth

    > for people who purchase houses or cars, their debt is likely many times their revenue

    There’s a big difference, though, between borrowing $200K to buy a $210K house, and borrowing $200K to pay for $4k/night of hookers and blow for a year, because at the end of the year, the homeowner still has a house, whereas the other guy has squadoosh.

    More generally, borrowing money to buy *things that you can sell to pay off your debt* is very, very different than borrowing money to pay your day to day expenses.

  3. Chris Cobb

    re irilyth’s example:

    True, but that’s generally why you can get a big mortgage for your house, and why you can’t get an unsecured loan for the same amount.

    It would be my hope that the federal government is not borrowing money to pay for hookers and blow: they just kicked a few folks out of the Secret Service for that sort of thing, I believe.

    Which government expenditures fall into the “buying a house” category of borrowing and which fall into the “day to day expenses” category is to a considerable extent a political question, however.

    What should be clear, however, is that paying interest on one’s debt to avoid default does makes about as much direct contribution to the public good as paying for hookers and blow (although, in the case of the federal government, continuing to pay interest so as not to blow up the world financial system is a notable indirect contribution to the public good that the alternative doesn’t offer), so the people get more public good per tax dollar as less tax revenue goes to debt servicing.

    So the people have a clear interest in not seeing public debt accrue frivolously, but the idea that running a deficit is never good policy is simplistic in the extreme. As long as the private economy runs on debt, the public economy will have to run deficits from time to time when the private economy contracts to prevent deflationary spirals.


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