Family Budget Analogy is Way Off the Mark

Politicians routinely try to equate the federal budget to a household one when explaining that the answers to solving our fiscal problems lie solely in cutting spending – just like you can't spend more than you take in without going bankrupt, neither can the government. But this flawed logic ignores an important reality: unlike an individual's paycheck, the revenue the government “takes in” is directly related to the money that it spends and the economic activity which results from it. Reducing the latter can also shrink the former. When it comes to our current federal budget, growing revenues is ultimately more important than cutting spending.

I realize that may seem counterintuitive, if only because we've been so heavily conditioned to think of the federal budget in irrelevant terms. In truth, the federal treasury has little relation to household economics – or even the economics of other nations, since as the printer of the world's reserve currency, the United States alone has the ability to settle all debts by printing more of its own money. While I'm certainly not advocating running up long-term debts, it is important to understand the dangers of gutting public spending. Unlike your household budget, saving money by cutting government expenditures is not simple math because cutting it the wrong way or too sharply, can quickly cause revenues to plummet – actually adding to the deficits rather than solving them.

A great deal of public spending is nothing more than the salary and benefits of public sector jobs. Cutting that spending might produce an immediate line-item budget reduction, but taking tens or hundreds of thousands of people out of the workforce has other consequences. First, the portion of those salaries paid into the treasury via income taxes disappears until they find new employment, so the savings are immediately mitigated by the percent which that worker pays.

Second, the $290 a week maximum unemployment benefit is unlikely to cover even their basic expenses like a mortgage and food, or a car payment, let alone discretionary spending, so the rest of the economy contracts with less disposable income cycling through it. As overall demand shrinks, goods begin to stockpile and production is curbed, leading to further layoffs and less tax revenue from less and less economic activity. The government also buys a lot of cars, computers, cell phones, etc. As this sort of spending is reduced, those businesses – already suffering from less demand because of the unemployment crisis – see their woes compounded, leading to … you guessed it: more layoffs.

$100 million in cuts can easily lead to $120 million in lost revenues, meaning that your deficit is growing rather than shrinking, even though you're spending less. The argument for economic austerity usually includes some sort of theory that less public debt will increase investor confidence and inspire the “job creators” to invest more money into the private sector, but anyone on Wall Street will tell you that high-unemployment, poor consumer confidence and sagging retail markets do anything but inspire economic expansion. From Mexico and Japan in the 90's to Greece and the U.K in recent years, economic austerity has failed miserably in every modern debt crisis.

Deficit hawks have warned for years that stimulative debt-spending will lead to skyrocketing interest rates, a mass exodus from dollar-denominated debt instruments and a collapse of the U.S. dollar. Today, interest rates remain close to zero, while inflation continues to tick along at historic lows and countries the world over continue to show more confidence in the dollar's security than any other currency, so much so that in many instances they are getting no return and in some cases actually paying money to keep their wealth safe in dollar-denominated instruments.

Historically, the United States and other countries with dynamic economies have successfully engaged in large-deficit spending in order to grow their economies to an extent where the ensuing tax revenues created by the new economic activity has more than made up for the money borrowed. The problem with recent stimulus efforts have not been an inherent flaw in that approach, but rather such a deep politicization of how much money is spent and on what or whom, that little care has been taken in ensuring that our investment is as big or direct as needed to drill down deeply enough into the economy to have a chance at kick-starting a growth cycle.

In a depressed consumption-based economy, the trick is to get as many consumers as possible into a position where they can spend money and fuel growth. The bottom 80 percent of American earners will always spend the vast majority of their earnings on the consumption of goods, while the higher above that mark you go, the more stockpiling of wealth that occurs. Trillions of dollars are already sitting on the sidelines, not because of anxiety over the national debt, but the absence of confidence in consumer-driven growth.

Decades of middle-class wage stagnation coupled with the recent era of money-supply mismanagement and the debt crisis it wrought has dug a hole which high unemployment has ruthlessly compounded. Policies which ensure that even more Americans can spend less into the economy will only make matters worse. Our immediate crisis is not in debt, but unemployment. Putting the emphasis on the former rather than the latter, only ensures that neither will be solved.

Dennis Maley's column appears every Thursday and Sunday in The Bradenton Times. He can be reached at dennis.maley@thebradentontimes.com. Click here to visit his column archive. You can also follow Dennis on Facebook. Sign up for a free email subscription and get The Bradenton Times' Thursday Weekly Recap and Sunday Edition delivered to your email box each week at no cost.