The next big fight between President Obama and Republicans will be over the need to raise the debt ceiling which puts a limit on government borrowing. The U.S. government has already hit this limit, but Secretary of the Treasurer, Timothy F. Geithner has been able to keep the government functioning through some clever moving around of government accounts. This can’t go on longer than a few more weeks before it sets up a replay of what happened in 2011, when for the first time ever the federal government’s credit rating was downgraded.
Some voters, and even daresay, some Republican legislators think that if we can’t at least have a balanced federal budget, then at least the debt ceiling is a good thing and should be used to force less spending.
To justify this position, an often heard argument goes something like this.
“I need to live within a budget. If I don’t, my credit get’s ruined, and it could lead to bankruptcy. Just like the rest of us, the federal government needs to balance its budget.”
Here are a two reasons why this isn’t a good argument, or a good analogy.
First, an individual, or even a household, has a finite lifetime, but a nation lives forever.
Creditors get very worried about an individual whose debts are always increasing, especially if the debt is increasing faster than is income over the debtors lifetime. Creditors fret they may get left holding the bag.
Not so with a nation. Compared to an individual, a nation’s lifetime is almost infinite. Most patriotic citizens believe their nation will live on as a shining light to humanity forever? It is true that in the sweep of history sometimes nations come and go, but a good working assumption is that they last a very, very long time. A nation’s creditors usually don’t fear they will be unable to cash in on their government bonds because the nation will cease to be. (Most of the creditors are us by the way. U.S. citizens and institutions hold most of the government debt. Less than half is owned by foreigners.)
So a nation with a strong economy can always refinance its debt (see caveat below).
Second, an individual’s, or a household’s, budget has little effect on the functioning of the overall economy. Not so for a nation’s budget.
An individual’s household budget is tiny relative to the national economy. Hence it matters not one whit to the economy, how much the household spends nor how much it saves or even if it just sticks some of its money in the mattress. (This is obviously not true if all us, or most of us, were to try to do this all at once.)
But a nation’s spending and taxes can have profound effects on the functioning of the economy. A large abrupt change in a nation’s spending or taxing can send a smoothly functioning economy into a recession or worse. Conversely, an economy that has suffered a sudden shock that has put it into a recession can be helped to right itself by an increase in government spending and/or a decrease in taxes. It is wise to take this into account when setting a nation’s budget
In the debt ceiling debate, remember these two arguments. The nation’s budget deficits are not what may do us in and wreck the full faith and credit of the United States. If that happens it will be the foolish inclination for voters to back politicians who would refuse to allow the government to manage its budget and debt in a way that helps the economy function as close to full employment as possible, and to borrow when needed.
This is not to say that a nation can ‘willy, nilly’ pursue long term spending and tax policies that drive deficits and debt ever higher as a percentage of its productive capacity as measured by gross domestic product. Sooner or later that could lead to trouble, the least of which is that interest payments on the debt would become ever higher proportions of the budget.
But we are not at that point with U.S. deficits and debt. Much of our current deficits are the result of the economy operating at far below full employment. If there is concern, it is a longer term issue with projections of long term health care costs, much of which are channeled through government programs – mostly Medicare and to some extent Medicaid.
We made decisions long ago to fund much of health care collectively through government programs and subsidized health insurance, just as most rich democratic nations do. What we need to do is to curtail the growth of health care costs. But we have time to pursue and try various policies to do this, some of them ongoing. A tentative, but good sign is that the latest numbers on health care costs show U. S. health care spending increased at historic lows for three years in a row.
The debt ceiling is artificial and serves no real purpose. It is more of a hindrance than a help in managing our nation’s budget.
The current debate should not be about using the debt ceiling to force the government budget towards balance, but about how to balance the need for a government budget that continues to push the economy towards full employment, while fashioning a tax and spending policy for the long run that protects the most vulnerable among us, and that doesn’t push debt to ever higher levels as a percentage of GDP over the long term.
If you like this, or find it useful or thought provoking, read more of my columns on economic policy.
Next up. The nation’s budget as a tool for ameliorating an undesirable distribution of the nation’s income. Stay tuned.