One of my favorite concepts from the Reagan-Bush era for its sheer silliness and misdirection is that of the federal government needing to have a 'balanced budget'. This of course only enters our lexicon when Democrats are in charge. And magically, one-half of the equation, taxation, never seems to be part of the solution.
What interests me is abandoning the whole concept of balancing the budget.
For one thing, the word budget carries some pretty intense emotional baggage, conjuring a whole range of emotions from guilt over the need to budget to fear of not knowing how to do it. For another, the federal budget is a uniquely ill-defined concept. It blends together two distinct kinds of accounting, a cash-based system and an accrual-based system.
(To grossly simplify, a cash-based accounting system looks at how much money physically comes in and out in a defined period of time. If more comes in than goes out, there's a surplus. If more goes out than comes in, there's a deficit. An accrual-based system, however, deals in concepts of assets and liabilities, of incurring expenses and revenues. When the cash flows in and out has operational consequences, but it doesn't affect the budget. For example, in a cash-based system, if I gave you a dollar on Tuesday and you promised to buy me lunch on Friday, you would show a surplus of $1 on Tuesday, because you would have $1 in cash with no outgoing payments. On an accrual basis, though, you would show a massive deficit, because the liability of my lunch Friday is much greater than $1.)
On top of the accounting system is another obstacle, defining what, exactly, is being accounted for. The federal government has several sources of tax receipts and spending outlays. And surprise surprise, different people use different approaches, often depending upon the point they wish to make. 'The budget' and 'the deficit' really need an indefinite article when uttered by most pundits trying to scare people. They're typically referring to a budget or deficit that best illustrates the point they wish to make. For example, Republicans trying to make the Bush years not look so bad frequently added Social Security's surplus to the budget numbers so the deficit didn't look as big.
I believe strongly that the best political response is to deny the whole framework of balancing the budget. Rather, we should worry about defining valuable spending. Once we know what outlays are worth funding, then we simply raise enough tax revenue to pay for them. A little more specifically, we save up a surplus when times are good and deficit spend when times are bad.
Embedded in the GOP call for a balanced budget is this notion that individual households have to balance their budgets, so it's only fair that USFG should, too. Well, let me say something that is at once obvious but also a little controversial.
That's totally bogus.
There's a concept in personal finance that describes how people make these kinds of decisions in their own life. The most efficient outcome is NOT for households to balance their budgets. Rather, the better outcome is to engage in a simple process called consumption smoothing. I want to emphasize that this is a basic, non-controversial, conservative observation. Crazy radical hippie leftist tree-hugging liberals, like Federal Reserve and OECD economists, research it. It's related to the permanent income hypothesis developed by total uber-progressive icon Milton Friedman. Those paragons of virtue, lobbyists, lobby for government to encourage it.
You see, consumption smoothing is simply another way of describing deficit spending. It means that sometimes you spend more than you earn, while other times you earn more than you spend. When you take out a loan, you're living beyond your means. That in and of itself is neither good nor bad. The sole determinant of whether a loan is good or bad is whether the value of what you get is greater than the cost of repaying the loan. If you are growing up in middle class America, there are two life events that are drilled into you from an early age as signaling your steps into adulthood, into respectability, into independence, into stature. Both of them involve borrowing (for most people): going to college and buying a house.
So think about that the next time you hear someone hyperventilating about the need to balance the budget. What they are saying is that America isn't worth investing in. And that key intellectual architects of conservative economic thinking are idiots (although to be fair, developing internally consistent policy positions is not exactly something at which the GOP excels).
Of course we have to fund federal outlays with taxation over the long term, just as student loans and mortgages have to be repaid over the long term. And in fact, just like excessive college debt and excessive mortgage debt, there's such a thing as too much government debt. There are good reasons to responsibly and proactively deal with our public finances. If spending on a particular program is wasteful, then of course we shouldn't spend those dollars. That's why so many people from all perspectives have argued for decades to cut the military budget in particular and corporate welfare more generally. If tax evasion is preventing the government from collecting taxes, then of course something should be done about it. IRS auditors going after the biggest tax cheats deliver some of the highest ROI in the entire federal government. And if the current method of dealing with a particular policy issue is unsustainable, then we of course should change it. That's why so many people from two diametrically opposed camps want to deal honestly with government funding of healthcare - basically, either by privatizing it or nationalizing it.
The key rhetorical shift is abandoning the concept of balancing the budget. It's a nebulous phrase that is at best meaningless, and more frequently counterproductive, for any given year's spending. We should fund programs that are worthwhile. Period. The twin powers of money printing and taxation provide more than sufficient funding for every idea on the table, from universal health insurance to rebuilding our infrastructure. That's why you never, ever, hear deficit concern trolling when it comes to things like the drug war, financial bailouts, or the war on terror. Cash flow presents precisely zero problems for the federal government. It's simply a non-issue.
Just like most 18 year olds can't pay for college and most first-time homebuyers can't pay for their house, the government isn't going to have enough tax receipts in a recession to pay for all the valuable programs. The notion that we should balance the budget is just as absurd as the notion that you should only go to college or move into a home if you can pay cash.
Now, there's nothing particularly unique or new in all of this. Some people are pretty direct in addressing the absurdity of (excessive, hypocritical) worrying about the deficit. Dean Baker's most recent piece talked about this being complete nonsense. Joseph Stiglitz has warned about deficit fetishism. Marshall Auerback is on a veritable crusade in support of deficit spending.
But for some reason, similar to several other issues, key Democrats seem to think they should take the GOP seriously on an issue that is much more justly met with derision. After all, given our three decade public policy proscription of cutting taxes on the rich and increasing wasteful spending on corporations, the best way to balance the budget going forward is to raise taxes on the rich and cut corporate welfare. It's quite understandable why Republicans want to scare people about government spending when Democrats are in charge.
What do Democrats have to gain by using the same language?
[P.S.] Let me add links to two additional recent commentaries by L Randall Wray and Bernie Sanders to float around cyberspace.
You can read these words all over again at The Seminal at FDL.