Roosevelt Institute Braintruster L. Randall Wray is Professor of Economics at the University of Missouri-Kansas City.
Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household's budget: "No household can continually spend more than its income, and neither can the federal government." On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household. Let us enumerate some relevant differences.
1. The US federal government is 221 years old, if we date its birth to the adoption of the Constitution. Arguably, that is about as good a date as we can find, since the Constitution established a common market in the US, forbade states from interfering with interstate trade (for example, through taxation), gave to the federal government the power to levy and collect taxes, and reserved for the federal government the power to create money, to regulate its value, and to fix standards of weight and measurement-from whence our money of account, the dollar, comes. I don't know any head of household with such an apparently indefinitely long lifespan. This might appear irrelevant, but it is not. When you die, your debts and assets need to be assumed and resolved. There is no "day of reckoning", no final piper-paying date for the sovereign government. Nor do I know any household with the power to levy taxes, to give a name to -- and issue -- the currency we use, and to demand that those taxes are paid in the currency it issues.
2. With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called "a fund to meet future deficits." In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson's efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.
3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. I don't know of any case of a national depression caused by a household budget surplus.
4. The federal government is the issuer of our currency. Its IOUs are always accepted in payment. Government actually spends by crediting bank deposits (and credits the reserves of those banks); if you don't want a bank deposit, government will give you cash; if you don't want cash it will give you a treasury bond. People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government's dollars. I wish my IOUs were so desirable. I don't know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency. OK, some counterfeiters try, but they go to jail.
5. Some claim that if the government continues to run deficits, some day the dollar's value will fall due to inflation; or its value will depreciate relative to foreign currencies. But only a moron would refuse to accept dollars today on the belief that at some unknown date in the hypothetical and distant future their value might be less than today's value. If you have dollars you don't want, please send them to me. Note that even if we accept that budget deficits can lead to currency devaluation, that is another obvious distinguishing characteristic: my household's spending in excess of income won't reduce the purchasing power of the dollar by any measurable amount.
If you put your mind to it, you will no doubt come up with other differences. I realize that distinguishing between a sovereign government and a household does not put to rest all deficit fears. But since this analogy is invoked so often, I hope that the next time you hear it used you will challenge the speaker to explain exactly why a government's budget is like a household's budget. If the speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a "sustainable"
pattern?
This post originally appeared on the NewDeal2.0
"The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits. "
Interesting. According to some around here, the US does not borrow its operating expenses from the private credit market and instead, 'makes its own money'.
But according to this, continued difficulty selling Treasuries will make our money more expensive to create, because it will be born with more interest attached. Presumably, that is interest that will be demanded by private lenders.
The dollar's hold over the top spot among international reserve currencies is not earned through worldwide affection for the dollar, but through worldwide intimidation by the dollar's issuers. A lot of people outside of America are scornful of what America has done with Bretton Woods in the post-WWII world. The trillions of loan-backed fiat dollars force-fed into the global economy to pay for our gluttonous appetite for imports ( like oil ) equate to a form of asset seizure through currency manipulation. Our trading partners remain bound to the dollar because the international financial establishment has made them 'an offer they can't refuse'.
This hegemony of the dollar comes from military threat and ongoing destabilization of any foreign country that attempts to conduct oil business without the dollar. Bombs and missiles circling oil supplies are the backbone of the dollar's enduring convertibility. It floats on threats, extortion, bribery, espionage, and assassinations, not on international enthusiasm for America's policies.
Your neighborhood grocery would take whatever debt-backed fiat currency you offered them, too, if you surrounded their store with tanks, aircraft carriers, and ICBM's, and they would recycle the paper that stuffed their cash register back into the debt of their most powerful customer, because they just wouldn't see a way out of the arrangement that didn't fix a crosshairs on their forehead.
"Of course, the last time we ran a budget surplus was during the Clinton years. "
The national debt went up every year under Clinton. And in Washington they call that surpluses. There were only surpluses if you ignore the budgeting smoke and mirrors. You are not running surpluses if the debt goes up every year. (The biggest distortion is how the feds account for money 'borrowed' from Social Security.)
When an individual is in debt, the person can either borrow more to buy a car to go to work (which is a wise thing) OR the individual can borrow and spend to drown his sorrow and mis-fortune on alcohol to tide him over his depression (a stupid thing).
We as a nation have been doing a lot of stupid things with borrowed money since President Ronald Reagan started borrowing and building up our federal debt.
And we all have been doing something similar at a personal level.
>>President Obama signed a bill Friday reinstating budget rules known as "paygo" – short for "pay as you go."
>>"Now, Congress will have to pay for what it spends, just like everybody else," he said.
This column's lead paragraph:
>>"Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household's budget: "No household can continually spend more than its income, and neither can the federal government."
Does this mean that Obama will now be called a 'free spending socialist' by some, and a 'whining, hysterical deficit demagogue' by others? :-)
For this reason alone, progressives ( who are allegedly defenders of the working class ) should hate the fact that the government and the central bank work in tandem to pay government bills with money born from debt.
Government hides from the unpopular task of taxing the wealthy harder to pay for its current operating costs ( because the wealthy are their donors ), and instead, shifts more and more of its bills off onto future generations, through its reliance on credit.
David
The clever ( some would say diabolical ) purpose of an elastic fiat monetary system created out of fractional reserves is to create a tool for manipulating the population into an addiction to credit. As the monetary supply is inflated, prices of goods rise to a level that makes them unattainable for most people using only their wages, so they supplement their standard of living by making purchases on credit. This 'feeling' you have of always playing catch up is not just some feeling, it's reality. The system is designed to trap you into a buy now, pay later mindset.
Since credit is the only 'product' issued by the banks, this creates permanent demand for their services. This is why the banking cartel is fanatical about capturing or installing their own central bank. The government must be eliminated as a lender of credit into the economy. Likewise, all competing forms of money must be outlawed, because any legal tender backed by something real like a precious metal will always drive the weak paper fiat of the central bank out.
By hiring the Fed to provide the nation's monetary supply, the government frees itself from
the restrictions of funding wars out of taxes. If the US government was forced to pay for overseas wars out of tax revenue instead of shoving the costs out into the future through money borrowed from the Fed, the numerous military involvements would not only be fiscally impossible, but politically impossible. There would be a citizens' revolt if war costs were extracted from current revenues.
The international financial establishment requires a large military to expand and defend emerging markets, crush popular resistance in developing countries, and capture and guard oil supplies- these and many other destructive missions of conquest are funded through the arrangement that the US government has with the private banking cartel. Ownership of the largest banks is integrated with ownership of the petroleum cartel and the network of defense contractors, and they all work towards symbiotic hegemony by making nations dependent on their credit system for access to money.
>>"It was the move off of the gold standard under Nixon that enabled the government to spend without taxation.
False. The government began spending in excess of tax revenue long before Nixon closed the gold window. That's easy enough to look up. FDR borrowed heavily during the depression, and during WWII. Johnson borrowed throughout Vietnam. That borrowing to pay for Vietnam was the final straw that broke the gold window.
They are hacking into google, our banks and the inner bowels of our govt. Their economy is expanding at 10% a year, while ours stalls. Chinese families are buying up California homes at a record-breaking pace, thanks to our devalued dollar.
Why haven't you considered the impact of entitlement programs that are unfunded, or approaching bankruptcy? Medicare, Medicaid,Social Security, Pharma. These deficits exist but are not acknowledged in deficit summaries.
You've done a good job of proving how the federal budget is different than a household budget.
Now, can you show us how smart you are by giving us some solutions to improve our jobs, econmic
growth and deficits, which still have to be paid off by household taxpayers? You are an economist, isn't that your primary mission?
As this article suggests the problem comes when we seek to gauge the gov't deficit situation by comparing it to a household's deficit situation, the federal deficit is linked not only to the spending and consumption of those in the household, but rather to every individual and business taxpayer's consumption and spending, and given that the stimulus spending is diffusing into the private sector and inducing consumption by both businesses and private companies gov't spending has a revenue generating component that a household does not, allow improvement in the larger economy does two things for gov't, it triggers the natural balancers to cut back (unemployment, medicare) just as natural revenue generators are picking up (Tax revenue)
The difference is colossal, the federal gov't family is considerably larger than a household's 2 working parents, the 300 million potential working members of the federal government revenue generating family members i.e. the middle class create a different dynamic , the only entity which benefits from a threatened working class willing to work for less and less in less rewarding jobs, in direct competition with 3rd world labor markets, and currency manipulating cheap importers is corporate interest who skirt tax obligations and fight for an even smaller gov't, now I wonder why
Freedom? I don't think so
Please explain something to me- you're boasting about the 'colossal revenue generating power' of the American workforce, but how can you enter that into evidence when our fiscal situation contradicts you? A 12 trillion dollar accumulated debt and many more trillions in unfunded liabilities tells us that we are chronically unable to generate the revenues demanded by government from our working population.
If we have the revenue-generating power you brag about...
why are we borrowing ourselves into bankruptcy?