Budgetary Matters… Governments, Businesses and Households

by Moe Kinney

An oft-repeated talking point regarding federal government spending is that it’s impossible to compare the federal budget with a household budget. The arrogantly erudite in the beltway believe that they can explain away their reckless and irresponsible spending policies by claiming that this is far too complicated for the average person running a household budget to comprehend. Even likening federal expenditures to business expenditures, is, in their adamant opinion a completely inappropriate comparison.

They’re partly right, but mostly wrong. Yes, there certainly are significant differences between these types of budget. For instance, when the people running a household budget make bad decisions and spend beyond their means, they personally suffer the consequences. It is they who must make the hard decisions to trim expenses, burden themselves with additional work, or possibly suffer bankruptcy and the negative ramifications thereof. By contrast, the fiscally irresponsible in Washington DC have generally been able to foist the consequences of their poor decisions off onto the next crop of elected officials and the next generation of taxpayers. They suffer no personal consequences and no additional work burden. The government equivalent of getting another job is to increase taxes, thus putting the work burden on the taxpayer. The only thing they have to lose is an election, after which they get a comfortable retirement or use their connections to get another lucrative job. The financial consequences of a poorly run and overly leveraged business fall on the executives making the decisions, along with the employees and the shareholders. Indeed there is at least one fundamental difference between government budgets and the budget of a household or a business. Responsibility.

Despite the repeated obfuscation and the arm waving of experts inside the beltway and in the mainstream media, there are undeniable parallels between all these types of budgets.

First and foremost, no household, business or government can operate on the basis of perpetual debt accumulation. Obviously the debt carrying capacity of these various entities is radically different in size. So too are the risks and relative interest rates. Furthermore, the U.S. Federal government can enlist the help of the Federal Reserve to engage in artificial credit expansion(the electronic equivalent of money printing) to buy government debt. A process known by the appropriately beguiling term “Quantitative Easing”; Something that has been done to the tune of trillions of dollars in recent years. None of these differences change the fundamental fact that there is a brick wall where the borrowing capacity of any entity stops. Even with a giant credit card and artificially low interest rates, there is a point where the interest on outstanding debt overwhelms revenue capacity. In other words, the point at which the interest payment on the accumulated debt is by itself equal to or greater than 100% of available revenue. Obviously any household or business loses access to credit and experiences bankruptcy long before this point is reached. A sovereign government may push the envelope further, but cannot defy what is a mathematical certainty. There is a finite debt carrying capacity after which revenue is insufficient to make the interest payments, let alone provide any services. At that point, the borrowing party is over.

There is a second parallel between government and business spending. The advocates of government deficits and so-called “stimulus” often refer to debt-financed government spending as “investment”. The fact is that a debt-financed government “investment” is no different than a debt-financed business investment. Investments that result in a positive rate of return may be termed “good” investments because they generate sufficient revenue to pay off the principal and interest on the debt that was used to finance them. By contrast, a “bad investment” is one that does not generate such a return. These poor investments leave behind devalued assets and a debt burden that must be paid off through other income sources or defaulted upon. Those who advocate for massive debt-financed government spending operate under the misguided assumption that government has a unique ability to differentiate good investments from bad. Government has no such ability. In fact, they are more inclined to make bad investments because, unlike a new or expanding business, they do not personally suffer the financial consequences. These advocates will claim that the government deficit spending is needed now to create jobs. Then, the arm waving and obfuscation begins in earnest as they try to explain how this deficit spending will ripple through the economy and magically generate enough tax revenue to pay back the debt. Therein lies the assumption that government has a crystal ball to identify only good investments. Pure nonsense. A bridge to nowhere or a ditch that is dug via one stimulus package and filled in with the next is no different than building a factory to make widgets that nobody wants to buy. These are bad investments which generate no positive return and leave behind a burden of unpaid debt and interest. This means losses or bankruptcy for a business and an unfunded future liability for the government. The difference being that the burden of loss on the misguided government “investment” must be born by a future taxpayer. This is harmful to the economy,

Beware the minions of big government, media and academia who attempt to convince us that government finances are so different from our own budgets as to be beyond our comprehension. We can certainly understand “revenue”, because we are the source … except that we call it “taxes”. The concepts of deficits and debt in the government context are not so different than in our personal context. There is no guarantee that a debt-financed government “investment” will generate a positive return. Government finances are certainly different, but mainly because the people making the decisions do not bear direct responsibility.

Moe Kinney is a member of Vermonters for Liberty

One thought on “Budgetary Matters… Governments, Businesses and Households

  1. But why can’t we get the left leaning politicians to understand that? And we need to spread the word through articles like these and educate the people. Very well done my hat is off to the author.

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