One More Time, the Government Is NOT Like a Household or a Business

Ron Dzwonkowski of the Detroit Free Press ran a column today urging people to participate in various “town hall” discussions to help figure out the US can deal with it’s “deficit” and the “debt” that must “lead to collapse”.

Mr. Dzwonkowski adopts the posture of  “reasonable, practical man” – not that of an ideologue.  In fact he appeals to “basic math and logic”.   But again, we see that Keynes was right:   Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Mr. Dzwonkowski is the slave of defunct economists from the late 1800’s and early 1900’s when gold and bankers reigned supreme.  This is not the world we live in today.  The following is the text of the email I sent him.

I was most disappointed in your column on Sunday, June 20. There are many reasons for my disappointment, but the greatest is your repetition of economic nonsense that is flatly, factually wrong.

I quote your opening:

Basic math — and logic — says you can’t keep spending almost $2 for every $1 in your pocket. However, neither rules in Washington, where our national government now adopts budgets that authorize spending more than $1 trillion beyond tax collections and has accumulated a debt in excess of $13 trillion, a simply incomprehensible number…..This can’t go on; it’s a formula for collapse.

Actually basic math and accounting (and “logic”) brings the exact opposite conclusion. I believe you have fallen prey to a very common error, an error that is promoted by people who know better (or should) but have reasons to keep people believing the error. The error is simple:

You assume that the national government is the same as any household or any business or any corporation. It is not.

Households, businesses, corporations, and even state governments are all “financing-constrained”. This means that before they can spend, they must raise the funding through either revenue (income or taxes depending on the entitity), borrowing, or selling assets. SImply put, they must have something in the checking account before writing the check to spend.

A national government is NOT the same as these other entities. A national government CAN and DOES spend without any restriction on raising the funds first.

For these purposes, I’m using a “national government” to mean one that is:

a. sovereign in it’s money (in other words, it is the sole source of determining what is money/legal tender inside it’s territory)

b. let’s it’s money float in exchange rate and doesn’t promise a fixed conversion rate into any other currency or gold

c. borrows money in it’s own currency (when it chooses to borrow) and not a foreign currency.

Who fits this definition? The U.S., Japan, Canada, the U.K., Australia, India, among many (most) others. Who doesn’t fit? Anybody in the Euro Monetary Union (Greece, Spain, Italy, France, Germany, etc). Who else doesn’t fit? Anybody that borrows in foreign currencies (Russia & Argentina in the 1990’s).

What I am explaining is not “an economic theory” – it is basic, fundamental national income accounting and fundamental banking procedures.

The blunt truth is that the U.S. can indeed continue to run deficits. The same people who claim that we are on the verge of collapse (as you claim is obvious) said exactly the same thing about Japan in the mid-1990’s. A decade and a half later Japan is still running “high deficits” and has no problem with either it’s budget or “solvency”.

The blunt truth is that when unemployment is well in excess of 9% nationally, any attempt to reduce deficit spending now by cutting spending or raising taxes will only further contract the economy, reduce actual tax collections and make the actual deficit bigger (see Ireland over the last 2 years).

The fundamental economic reality (again, basic math and accounting, not “theory”) is that if the private sector, you and me and private businesses, want to get financially richer, that is if we want to see our bank balances and 401K’s get bigger over time, the government, the public sector, must run a deficit. It is simply impossible for the private sector to net save money AND have the government run a surplus at the same time. (technically, there is one situation where it is possible, but that can ONLY happen if net exports is so large – think 20% or more of GDP – Chinese scale. Such large net exports cannot happen in all countries at once).

These are not the thoughts of sole “crank professor”. I could provide plenty of support for everything I’ve said. In fact, if you are interested, I would be happy to discuss it further and help you learn.

I am distressed because I work so hard to educate students to think critically, evaluate the evidence, and make sound “logical” conclusions. But I can only reach maybe 150 students per semester. You, however, reach thousands of people and you repeat what are eggregious errors of math, logic, and accounting, while repeating these fallacies while posturing as a neutral adult voice of reason. I could leave it at that, except that this epidemic of illogical thinking about government budgets has consequences. Social services will be sacrificed on an the alter of 1800’s economics theory where governments were constrained by what gold the bankers would lend them.