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The U.S. Government Always Balances its Budget

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The U.S. Government Always Balances its Budget

The U.S. government does not run a budget deficit, ever. When the bills come due, the bills get paid. The federal government never defaults on its obligations. The only thing that can prevent a balanced budget would be if Congress refused to increase the debt limit.

If you are reading this online, you might be screaming at the screen right now. “How absurd! This is idiotic! Of course the government doesn’t balance its budget every year! The bills get paid because the government increases its debt, not because the government takes in enough revenue. They just print more money. That is not balancing the budget!”

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Okay, you have a point. But I have a point to make also. I used an absurd statement in order to point out some equally-absurd statements against allowing the government to ever run a deficit. My original statement is false. A budget is not balanced if total revenue isn’t enough to cover total expenditures. The U.S. government indeed does NOT always balance its budget. It is important to note that total expenditures include current payments made as well as contracts entered into for future payments to be made. If you only count payments made as they come due, then my statement would be correct. The United States government has always paid its obligations when they come due. The United States government does have a history of never running a budget deficit, if you count the bills when they come due instead of counting when the obligations are entered into.

But that isn’t what we are talking about when we discuss the budget deficit. The budget deficit is based on future obligations entered into, not on current bills due. With one definition of a deficit (my original one above), the United States never runs a deficit. But with the commonly-used definition of a deficit, we get a different story. The historical fact is that the U.S. government rarely balances its budget.

Keep this in mind. A deficit occurs when obligations for future payments are incurred. That is the definition of a deficit we are using when we discuss the government’s budget.

By the same token, and using the same definition, households and businesses don’t always balance their budgets either. I have used an absurd statement about the government balancing its budget, by using an alternative definition of what a budget is, in order to make a point about equally absurd political rhetoric used to equate government spending with household and business spending.

When a household puts anything on credit that doesn’t get paid off right away, it is running a deficit – if you use the same definition for a deficit that you are using when you discuss a government deficit. When people take out mortgages to be paid off over a long period of time; when they take on car payments, credit card payments, student loans, bank loans, and any other obligation where the entire obligation is not paid off in the same year, then they are running a deficit – if you use the same definition for a deficit. Households run deficits the same way the government runs a deficit.

Businesses routinely use credit. Not just to cover start-up costs, major expansions, and unexpected catastrophes, but for a host of other reasons. Large businesses hire expensive tax attorneys and accountants to tell them when and how to leverage, when increasing debt is in their best interest. Using the same definition that you use for government, businesses don’t always balance their budgets either.

The federal government covers its budget shortfall by offering treasury securities for sale to the public. The public buys these up because they are considered the safest investments in the entire world. Even when the ratings agencies decided to downgrade these securities, the prices went up because the public trusts these investments and the ratings don’t matter. What becomes debt for the government is an investment for investors, and a very popular one. And the U.S. has never defaulted on this debt. The point I am trying to make is this:

Statements such as:

Government deficits are wrong because we the people always have to live within our budgets; and the government should too

and

Government deficits are wrong because businesses have to pay their bills and the government should too

are simply invalid arguments. Those are meaningless words, but people make those kinds of statements all the time.

Those kinds of statements can only be true if you take the same definition of deficits that I used for the government when I made the claim that the government never runs a deficit, and apply it to households and businesses; while at the same time, use a different definition for the same term and apply it to the government. Applying a different definition for deficits to the government than you do to households and businesses, and then making arguments as if they are the same things, is an inconsistent comparison, a type of non sequitur logical fallacy. It simply is not valid. The statement that I made above, that the government always balances its budget, is false. I only made that statement in order to point out the equally absurd argument that the government should be forced to balance its budget every year because households and businesses have to.

I could stop right here. I have made my point. But if I leave it at this, I can just see a lot of people saying something like “he just said that deficits are always good.” No, I did not say that. Don’t read something that is not here into what I am saying and then argue against what you are reading into it. Doing so would be a straw man argument; also invalid.

I also did not say that the government is the same as a household or a business. I said that the definition of a deficit should be consistently applied when comparing governments, households, and businesses. But I did not say that these entities are the same. There are important differences when it comes to the wisdom of deficit spending. Important similarities also exist.

First, the similarities: Think in terms of opportunity cost. Debt, whether undertaken by individuals, households, businesses, or governments, is undertaken for the purpose of gaining something. It is a trade-off. If the benefits of any specific instance of deficit spending outweigh the costs, relative to other options, then adding to debt would be a wise choice. If the costs outweigh the benefits, then doing so would not be wise. If a different option creates a better net benefit, then deficit spending is not wise. The true cost of any decision is the opportunity cost. Deficit spending is an investment in the future, and this investment can be wise or unwise. For many people, the debt associated with a mortgage is a wise trade-off for home ownership. Many other people choose never to go into debt. They choose to pay for everything out of money that they have already received. The trade-off for these people is a limited ability to make large-ticket purchases as well as a limited ability to increase their standard of living. Unless somebody gives them a large sum of money somewhere, most people cannot increase their standard of living very much without taking on some debt somewhere along the line. Debt can be looked on as an investment in the future, so deciding to forgo debt means forgoing that particular investment. The same thing can be said for government spending. The wisdom of each choice is not clear until all of the costs and benefits have been factored in – on a case by case basis.

But there are important differences. One obvious difference is that the federal government gets to print its own money. Also, the government gets to make the rules. These facts can make adding to debt seem less painful for the government in the short run. It means that the government could have incentives to add to debt without a full cost/benefit analysis. But it does not mean that government debt is always bad, and that the cost of debt to taxpayers is always higher than the benefits. It does mean that we as taxpayers need to be vigilant. We need to be fully aware of all potential costs and benefits. For example, there are safeguards in place that are designed to give the government an incentive to make these decisions based on net benefit; the big-picture benefits to shoot for are even defined for the government. Do you know what these safeguards are, which ways they work, and which ways they fail? Do you know the historical record of the economic outcomes of various spending decisions?

I’ll mention one other important difference. Households consume goods and services. Businesses produce goods and services. The U.S. government does neither. Spending means different things for these three types of entities. Because of this, the costs and benefits are going to be different.

“Wait”, you may say. Government spending IS consumption. No, it isn’t, not when you are doing a cost/benefit analysis based on opportunity costs. When the government spends, it is acting as sort of a middleman for the private sector. Everything that the government does affects both consumption and production in the private sector. These effects can be huge. They can be negative effects. But they also can be positive effects. Government services provide the means for private industry and the economy to function. Government activities can mitigate and even reverse the negative effects of a recession.

All government actions affect the economy. These actions can have positive effects, and they can have negative effects. Each situation is different. It is up to citizens to monitor their government and hold it responsible. But this requires a cost/benefit analysis of individual situations. It doesn’t serve any useful purpose to make a simplistic statement such as “the government is always the problem” or “the private sector can do everything that the government can do, only better”. Those kinds of statements might have strong political and emotional appeal, but they are extremely easy to prove false. Attempts to justify them usually involve arguments of sweeping generalization. as well as ad nauseum, both logical fallacies. Sweeping generalization means that an obvious conclusion reached from some specific situation is used as evidence that the same specific conclusion will “always” result in every other situation. Ad nauseum means that the same line, the same truism, is repeated over and over again until people hear them so often that they come to the conclusion that the statements must be true – so these people ignore the real evidence to the contrary.

Government spending can and does have positive aspects, but also negative aspects. It makes sense to look at these aspects for specific situations. It does not make sense to avoid looking at the real costs and benefits by making fallacious sweeping generalizations. Part of the cost/benefit analysis for government spending involves the decision to pay for expenditures with current tax revenue (and the decision on how and from whom to raise this revenue) or to pay for expenditures with additional debt. Each one of these options has its own advantages and disadvantages, and just as in the private sector, a combination of current revenue and new debt can be the best answer.

What about the idea of lowering total government spending just for its own sake? What about austerity as an economic policy?

Apply the same kind of cost/benefit analysis. Do you know the actual results, the costs and benefits, from opposing policies in various situations? There is a very long historical record on this; do you know what it is? Do you know the difference between the statements of simplicity, the rhetoric, and the actual record? There is no need to cite old theories based on controlled circumstances that do not exist in the real world; there is an actual real-world record. And in cases where the Constitution is mentioned in the arguments as a reason to oppose government debt of any kind, or government spending for certain kinds of expenditures (such as general welfare), do you know the difference between the rhetoric and the actual wording of the Constitution?


A version of this essay is included as a chapter in the book Common Misconceptions of Economic Policy by Jerry Wyant. You can purchase this book in paperback form from Amazon and other online book distributors. The list price is $12.99 (only $9.99 using discount code TA9GTK7E when ordering, depending on the distribution channel). Or if you prefer, you can download a digital version on your device (Kindle, Nook, etc.) for $4.99.

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Author: 
Jerry Wyant
Date: 
2014-08-04
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