StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Right Analogy, Wrong Timing

08 Jul 2011
Posted by Andrew Samwick

Should the government budget the way families do?  Here's an excerpt from Paul Krugman's latest column:

One striking example of this rightward shift came in last weekend’s presidential address, in which Mr. Obama had this to say about the economics of the budget: “Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.”

That’s three of the right’s favorite economic fallacies in just two sentences. No, the government shouldn’t budget the way families do; on the contrary, trying to balance the budget in times of economic distress is a recipe for deepening the slump. Spending cuts right now wouldn’t “put the economy on sounder footing.” They would reduce growth and raise unemployment. And last but not least, businesses aren’t holding back because they lack confidence in government policies; they’re holding back because they don’t have enough customers — a problem that would be made worse, not better, by short-term spending cuts.

Actually, the government should budget the way families should.  It's just not clear that families actually do what they should.  Both families and the government should budget countercyclically -- their savings rates should be higher during periods of growth than during periods of economic decline, so that their consumption can remain steady across booms and busts.  The problem that both the government and families are having today is that neither one saved enough during the most recent boom, and so both are having to cut back more than would be ideal during this protracted downturn.

Given what the families (and the private sector more broadly) are doing, I agree with most of what Brad DeLong has now deemed the "Hippie Caucus" suggests the government should do -- continued government spending while labor and capital are underemployed and underutilized.  (In fairness, I was a charter member of this caucus.)  My only break with the caucus is that I believe that all of the active countercyclical stimulus should come in the form of public investment to close the $1 trillion gap in our infrastructure needs (a total need of $2.2 trillion, only about half of which is likely to be appropriated over five years).  No tax giveaways.  No grants to states who budgeted particularly badly (loans would be okay).  Just build what we need.

In fairness to the Obama Administration, it inherited a recession, which has been followed, predictably, by a jobless recovery.  We have not gotten to see the Obama Administration during a boom to see whether it would budget during an upturn the way both families and the government should.

Sadly, counter-cyclical

Sadly, counter-cyclical policy has gone out of fashion. We can only pray that it comes back.

Infrastructure spending would be fine. Many policies would be fine. Anything would be preferable to slashing spending in the midst of an economy devastating by the lack of spending.

Focusing on the deficit at the moment is lunacy. We need short-run stimulus and long-range balance, in that order.

Just build what we need

Easily said, but like most families, the government did not leave itself any construction need for countercyclical investment after the bubble. The government is proposing wasteful construction projects that there is no need for solely for the sake of "creating jobs". Spending for the sake of spending is just waste. We need to change the debate from stimulus and jobs to actual need.

There's a huge unment need for gov't infrastructure investment

the government did not leave itself any construction need for countercyclical investment after the bubble

I'm not sure what you were thinking there, foosion.

The nation's public infrastructure is positively creaking with age.

There is a huge backlog of repair and replacement that not only will would let us put people to work (in an industry hardest hit by the real estate bust), but would save us money in the long run. Deferring maintenance/repair/replacement too long results in higher costs, not lower.

There's nothing wasteful about replacing water pipes, sewage pipes, bridges, overpasses, etc., that have started failing or are past their expected lifetimes.

and Corporations

To extend the analogy, Boeing, and Microsoft, and GM all became huge, successful corporations solely on retained earnings, living within their means,right? No borrowing?

Krugman's continual Keynesian

Krugman's continual Keynesian parroting of "austerity" is ludicrous. We are currently running deficits comparable to Greece (10+% of GDP). The much-discussed (and never seen to date) "austerity" measures would move us into the realm of Japan/Egypt deficit spending (7+% of GDP). He would seem to prefer that we run deficits along the lines of perhaps Afghanistan (14%) or Iraq (23% of GDP) who are, fortunately, being advised by us paragons of fiscal rectitude.
We have the highest peacetime deficits in our history - and our current deficit is higher than even during the Civil War. We are so ludicrously far from "balancing the budget" - or even contemplating it - that raising it is a pure strawman.

Countries with wild cultural differences re taxes and spending and federal/local responsibility - Sweden, Switzerland, Canada, Chile, Taiwan - had little problem putting together balanced budgets - actual balanced budgets. Even creating the conditions for constitutional amendments during recessions (cf Switzerland) or balancing budgets after a purely financial crisis (cf Sweden). The reason that can't happen here in the US is because our government is as corrupt as Egypt/Chad and as dishonest as Greece/Japan. The left - justified by people like Krugman - campaigns on free lunches rather than on increasing taxes to even pay for existing spending. The right campaigns on tax cuts rather than spending cuts. And the bureaucracy always finds a way to keep on growing.

And Krugman on small business? Yes please oh tenured professor who has never worked outside academia or government. Tell us how our "animal spirits" are just down in the dumps. How, indeed, we who take risks are the real problem.

It isn't that small business is being strangled by a federal government that is entirely geared towards protecting big established businesses from either competition or the consequences of their own bad decisions - via monetary policy, fiscal policy, regulatory policy, even foreign policy. That everything - everything - they do is intended to tilt the playing field against a new business. When Obama wants some photo opp to demonstrate that he isn't clueless about the private sector and economic growth, he calls in the usual suspects of multinational/Davos cronies. Bush was the same. As was Clinton. And Bush I. And Reagan was conflicted. No no. It is small business entrepreneurs and "customers" who are to blame.

If any small business I start fails, I will simply lose everything. If I succeed, everything will be taken from me and the playing field will be tilted even further against me. Heads I lose, tails I lose. Attention Krugman! Playing that game is not a "risk". It is a certainty of loss. Might as well move to a country that is more honestly cronyist. At least they have functional black markets. And no Krugman hanging out a shingle as some expert on finding customers.


“We have the highest peacetime deficits in our history...”

Peacetime? We are currently engaged in two wars.

Families in Crisis

What happens when the favorite youngest child is laid off and needs a place to live? The American family does not tighten its belt and refuse to help. The American family opens its house for a temporary place to live and pays the youngest child to do work around the house, etc. This is the way families respond to crises. Obama is making an analogy is for the wrong family.

The analogy Mr Obama uses is what happens when wealthy banksters lose money. A few cutbacks and belt tightenings on luxury items here and there, and a lot less money donated to charity. So our government should act like selfish elitist banksters that cheat the public to grab more for themselves? This ridiculous Obama analogy is so TONE DEAF.

Just Like Families Do

Obama and his fellow Republicans are right. Government should act more like families:

Families go into long-term debt to build a house that is a living space in the short term and becomes an asset that improves their financial position the long term. Families take out more debt to pay for improvements that make their lives more comfortable and increase the value of their financial asset.

Families go into short-term debt when they use their credit card to pay for something that will be needed in the future that becomes available at a temporarily lower price.

Families go into short-term debt to pay for emergencies immediately, understanding that the costs increase dramatically if they delay getting the needed medical procedure or fixing the leaking roof.

Families go into short-term debt to bridge a short-term financial downturn like a loss of income.

Some families go into debt to launch their own business as a way to achieve financial independence and to meet the more intangible goals of improving their spiritual and emotional well-being.

Families go into long-term debt to pay for the education of their children as a way to increase their earning power in the future.

Debt, whether it is used by a family or a government, is neither "good" nor "evil". It is merely a tool that creates benefits if it's used well and causes harm if it isn't.

Debt, whether it is used by a

Debt, whether it is used by a family or a government, is neither "good" nor "evil". It is merely a tool that creates benefits if it's used well and causes harm if it isn't.

Yep. And it is doubly foolish not to take on debt to be used well when the cost of borrowing that money is at historical lows. Of course, taking on debt to dump into the sands of the middle east and south/central asia or to given tax breaks to entities that will simply take those tax breaks and save them is not using the debt well. However, taking on debt to fix our crumbling infrastructure and simultaneously put people to work is using it well.

Excellent comment, SteveT!

Gov't's budgets are not life families

The government budget is not comparable to a family budget. Families have a fixed lifespan while governments hopefully persist indefinitely. A family's income grows, then plateaus, and then shrinks, while a gov't income, homefully, will continue to grow indefinitely. A family must accumulate savings for retirement, while a gov't could carry debt indefinitely. Comparing a gov't budget to a family budget ignores these fundamental differences.

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