Have you ever heard the platitude, “If the government were a business…”? It’s idea is that unless the government models itself off of a wildly successful and efficient corporation, it is running the country into the ground. Some pundits even like the misnomer “CEO-in-Chief” to describe the President.
This idea of the government as a business is incredibly dangerous for economic policy. Because profits are good for a business, the analogy leads to the idea that surpluses are good for the government. All the time.
The federal government’s budget, just like the Federal Reserve’s interest rate, is supposed to be countercyclical. When the economy is doing well, tax revenues will be up and there will be less demand for public resources. During recessions, the government will take in less money while providing more services. In effect, a surplus takes money out of the economy during a boom, and injects it during a bust.
Surpluses and deficits are just a fact of life in governmental policy. The sheer size of the current federal deficit is dangerous, of course, but for completely different reasons than these. The business analogy of government leads to very deceptive political demagoguery, that is easy to conceptualize from a non-macroeconomic perspective.
If anything, the lack of real growth following the upswing from the current recession should lead to the conclusion that more stimulus needs injected into the economy, i.e., a bigger federal deficit. State governments are facing huge shortfalls, meaning that many states will have to raise tax revenues while facing crushing unemployment and poor consumer demand, not to mention the possibility of price depression.
If you think of the government as a business, you are reading important economic indicators completely wrong. You probably also don’t understand the purpose of taxation. The prevalence of this lack of understanding is extremely troubling given the large amount of political activity this year, with its apparent goal being to solve our nations economic difficulties.
Well, not really. You ignore two key aspects of federal deficit spending: (1) what it is spent on, and (2) where the deficit is borrowed from.
Neither of these issues is comforting (putting it politely). Deficit spending on non-productive entitlements financed by China and Japan (as opposed to other American savings surplus) is the road to hell, not salvation.
I offer this as a further thought:
http://wp.me/pMW8w-8K
Indeed! There’s lots of troubling things about the Budget, and how the government spends money in general. Generally (and historically), though, there’s nothing wrong with a budget deficit. Or at least the idea of a budget deficit.
Any ideas on tax reform?