The Nation’s Economy Is Not Like A Family Budget

Posted on December 14, 2012

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Dr. Alieta Eck, past president of the Association of American Physicians and Surgeons, recently published an article entitled, “The Grown-Up Approach to the Fiscal Cliff.” As I understand it, her major contention is summed up in the following extract:

Our people have the idea that the government gives things out for free. But the stark reality is that credit cards come due, the balance needs to be paid, and our government simply does not have the money. Any wise consumer knows that borrowing money to buy groceries cannot go on for long. Whatever happened to thrift, a solid work ethic, and living within one’s means?Budget ahead -road sign

This idea that Americans in general, and Christians in particular, have an obligation to insist that our nation’s fiscal policies conform to those that would be wise for a family to follow is often heard these days. Yet, a nation’s economy is not like a family budget. That’s why Dr. Eck’s title is, to my mind, so very misleading. Her’s is not “The” approach, as if no other could possibility be valid. And, in my view, it’s not particularly “Grown-Up.”

An example is the statement, “Any wise consumer knows that borrowing money to buy groceries cannot go on for long.” But that’s a child’s analogy. The more pertinent one would be borrowing money to invest in a business. Then, as that investment starts returning profits, the borrowed money can be repaid.

A nation borrows to invest in projects that position it for economic growth: infrastructure such as roads and bridges (which desperately need investment now for safety’s sake), education, research, social safety net, health coverage, etc. All these, if managed correctly, eventually return a “profit” to the society through economic growth that allows paying off the debt.

That’s what began happening in the Clinton years when he generated a budget surplus by raising tax rates, allowing us to begin paying off the debt. It was his successor, George W. Bush, following the discredited mantra that lowering taxes at the high end brings growth (see article here), who returned us to rising deficits by bringing down tax rates, which effectively stopped us paying off the debt. The problem was not that the nation borrowed to invest in its economy. The problem came when instead of using the prosperity that borrowing stimulated to pay down the debt at the appropriate time, we tried to keep on spending instead of taxing ourselves to repay what we borrowed.

It’s true that spending needs to be cut and the deficit shrunk to get the nation onto firm fiscal footing. But as Nobel Prize winning economist Paul Krugman says, a nation should cut spending not when it’s economy is just beginning to recover from a deep recession, but after the recovery has gathered strong momentum. Just as government spending stimulates the economy, removal of that spending depresses economic activity. Cutting spending inevitably retards economic growth and should be done when that growth is strong, not when it’s just trying to pick up steam.

So, it’s not only Dr. Eck’s title that is misleading – it is the whole thought process that underlies it. Think about it: A family that avoids borrowing in order to live beyond its means will probably be in good financial shape. But a nation where there is no borrowing (no effective banking system) is a third world economy mired in poverty. There must be an effective balance between borrowing and repaying, each at its proper time.

Our nation’s economy and a family budget are not equivalent things. The idea that they are is the fallacy of Dr. Eck’s argument.

Ron Franklin

 

Image credit: 401kcalculator.org via flickr (CC BY-SA 2.0)

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