One solution to this problem [of cutting government investment in deficit reduction] would be to have a capital budget that segregates government investment spending from consumption spending. Virtually all the states do this already. Conservatives who routinely defend a balanced-budget amendment to the Constitution, on the grounds that the states must balance their budgets annually, appear to be unaware that such requirements apply only to operating budgets, excluding capital outlays.
If households were required to balance their budgets the way balanced-budget amendment supporters want the federal government to operate, they would almost never be able to buy homes or cars. Such outlays almost always exceed their annual incomes over and above consumption and would thus constitute deficit spending.
Of course, families could draw down savings to buy homes and cars. But that’s an option not available to the government because it has no savings, only a large debt. Treating it and private individuals the same way, as balanced-budget supporters propose, would require the entire national debt to be paid off and a surplus accumulated before it would be permitted to make new investments in roads, bridges, buildings and other long-lived assets.The New York Times — Economix
Mismeasurement of Federal Spending, Investment and Saving
Bruce Bartlett
Another silly thing about the government as big household or firm analogy is debt to GDP (national income) ratio compared with corporate debt to firm income ratio, which is often much higher.
While the analogy fails on the currency issuer v. user basis, it also fails on the basis of actual operations and financial ratios.
I realise it’s a good idea to use any sort of trickery to get the economically illiterate political right to accept deficits, but Bruce Bartlett’s argument doesn’t actually stand inspection.
ReplyDeleteHis claim that it makes sense for governments to borrow in order to fund capital projects has great common sense appeal. And to back his claim he says that that’s what private sector entities do. Well, actually private sector entities DON’T ALWAYS borrow in order to fund investments.
Where a private sector entity DOES BORROW, it’s because it hasn’t got the cash to fund an investment. E.g. if you want a new car costing $X, and you happen to have at least $X of surplus funds in the bank, there’s not much point in borrowing is there?
There is actually a Swiss economist who published a paper on this subject, which concluded that government investments should be paid for out of tax rather than borrowing. (Details below).
Next, Bartlett claims “Virtually all homeowners . . . borrow to buy homes.” The reality is that (at least in The Netherlands) the average equity stake in homes is 45% according to this source:
http://www.eres.org/eres2010/contents/papers/id341.pdf
So you can turn Bartlett’s claim on its head and say “Virtually all homeowners fund their home purchases from their own resources.”
Another flaw in Bartlett’s argument is that if one balances the current spending part of the budget and has a deficit just on the capital part, AND if one varies the “capital deficit” so as to deal with recessions, one would then get wild gyrations in the amount of capital spending.
But to repeat, while Bartlett’s argument is flawed, there’s not the slightest chance of the appallingly stupid political right spotting the flaws. So perhaps he’s got some sort of a point.
Swiss paper:
Kellermann, K. (2007). Debt financing of public investment: On a popular misinterpretation of “the golden rule of public sector borrowing”.
European Journal of Political Economy, 23 (4): 1088-1104.
Exactly!!!
ReplyDelete