In November, right before the great tax compromise deal, Obama said: "Small businesses and families are tightening their belts. Their government should too."
Every day you can hear on the TV a right-wing talking head say something similar.
I'm just sick of it.
There's an email going around that finally made me flip my lid. Here it is:
Philip Greenspun divided the U.S. 2011 federal budget by 100,000,000 and wrote a little parable:
We have a family that is spending $38,200 per year. The family's income is $21,700 per year. The family adds $16,500 in credit card debt every year in order to pay its bills. After a long and difficult debate among family members, keeping in mind that it was not going to be possible to borrow $16,500 every year forever, the parents and children agreed that a $380/year premium cable subscription could be terminated. So now the family will have to borrow only $16,120 per year.
This is so simple, and it sounds so good. It's clever and easy to forward or repeat over the water cooler. The friend I got it from is actually pretty liberal, just a little confused.
I'm not an economist, but my Ec 101 taught me that there are major differences between a family and the federal government. Here's what I think about this analogy...
The whole "family" comparison that the right wing is trying to propagate is bullshit. It gets a lot of traction because it's simple and easy to talk about; it's smart marketing for their agenda, which they are very good at. But there are a whole bunch of reasons why the federal government is nothing like a family or individual.
First of all, the government can regulate not just how much it's spending, but also how much revenue it receives. Want more revenue? You can simply take in more by saying so. Most individuals or families can't do that.
More importantly, when the federal government spends money, it's not the same as when a family spends money. This is because the government gets a portion (or sometimes all, or more than all) of the money it spends back when it collects taxes. Think about the simplest example: if the government gave you $1,000,000, it would collect $350,000 of that right back in taxes (revenue). No family can do that. If you gave $600,000 of your million to me, then I would owe the government an additional $210,000 in taxes. So with just two people in the economy, the government has gotten back $560,000 of the million it spent.
Rather than a regular family, the government is more like a mafia family, collecting their share off the top of everyone else's income. So if they spend money in their neighborhood, it's not like a normal person spending money -- they know they're going to get a portion of their money back, off the top.
Moreover, government spending, especially during periods of high unemployment like this one, creates jobs and thereby creates additional revenue. This is called a "multiplier effect."
Depending on what kind of spending it is, it often creates more revenue than it costs. If it's spending that leads to better infrastructure (better transportation, ports, rail, etc) or goes primary to a broad base of low-income people (unemployment payments, food stamps) it has a higher multiplier effect. The reason is pretty easy to understand. Better infrastructure leads to higher productivity, helping other businesses make more money than they would've. Helping other business make more money leads to more money for the government. Spending on low income citizens means that every dollar they get goes back into the economy. In the million dollar example above, you kept $50,000 in savings and I kept $390,000. Lower income people don't save anything, they spend whatever they take in. So if the government gives $10 to 100,000 poor people, every one of those million dollars will be spent in the economy, and the government will get a cut back of every one of those dollars. When the dollars are spent again and again, the government gets more back than the million they initially spent. Again, no comparison to a family.
Of course, the right doesn't like that idea so has tried to argue the opposite-- that tax cuts, particularly on the "producers" (corporations and the rich) actually create more jobs and lead to higher federal revenues. Unfortunately, research has repeatedly documented this not to be the case. As you can see from the million dollars the government gave you, when the government gives money to wealthier individuals, they get less money back as a multiplier effect because wealthier people save more, they don't spend it all.
Now, for the borrowing piece. As I understand it, the rate at which the government can borrow money right now is at an all-time low. The government is borrowing trillions at about 4% interest. So, on investments on infrastructure and jobs, where the government gets more than 4% annually on what it spends, it's absolutely the wrong thing for them to do to not spend as much as they can right now. They should be building cross-country high speed rail, revamping our energy infrastructure, and fixing roads and sewers everywhere. These kinds of investments will grow GDP and increase future revenues by more than the amount it costs to borrow.
As one of my favorite bloggers wrote:
"With tremendously low borrowing costs, the US should be raising a ton of cash and building supertrains and hiring streetsweepers for my urban hellhole and fixing water systems and, oh, cleaning up the Gulf coast, and basically anything else to increase employment and employment opportunities."
Those are the
fiscal policy (taxing and spending) reasons that the government is different from a family.
But it's also different because of monetary policy. That is, because this family can change how much their debts are actually worth. Right now, the Fed has their rate set at 0% which, when the economy starts to pick up again, is going to lead to inflation. Nobody likes hyperinflation, where the value of money drops super fast and society is plunged into chaos. But a little bit of inflation (3% or so) is friendly to debtors. That's because the real value of their debts is decreased by that rate, every year, even if they don't pay any of it off. Wait long enough and the debt will be worth very little. Imagine a "family" if the "family" had debts denominated in a currency called "kossies", and new kossies could be drawn on a piece a paper by any family member whenever they wanted new ones. They could pay their debts with these new kossies, or spend more with them, or both.
Doesn't sound as scary now, does it?
Fear-mongers say that increased spending and free monetary policy like this will lead to higher borrowing costs, but so far it hasn't happened. The borrowing costs for the government (the interest rate on Treasuries) is still at record lows. Why? Because the world's investors still believe that the US is the safest investment around. There is debate about whether inflation has taken off yet. Krugman and others say that inflation hasn't taken off yet because the economy is still so depressed. Look at housing prices, so instance, which are still in a deflationary spiral. But other things -- oil, commodities, food, seem to be rising in price. Overall, the official government figures show little to no inflation, and the rises in price in commodities might be caused by financial speculators (as was the case in 2008). Regardless, being able to print your own money makes the federal government very different from a family.
This is the reason why the states are in a deeper budget problem than the federal government. They can't print their own money. They don't have quite as much ability to raise taxes if they want to, because it's easier to relocate to a different state than it is to leave the country. And they have higher borrowing costs because their economies aren't as diversified, so international investors see them as riskier investments.
Anyway, sorry for the long and overly simplified description. I've just been hearing the family metaphor popping out of the mouths of every right-wing talking head, and I'm sick of it. Like most of their talking points, it's awesome marketing because it's so simple, but it's not really reflective of reality. I wish the left wing was better at coming up with simple explanations of reality.
Also, as I said, I'm not an economist. If you have any corrections to my understanding of matters, please let me know... I'd love to learn more.