A congressman was once attributed with the saying, apropos of the budget, “a billion here, and a billion there, and pretty soon you’re talking real money.” It’s a saying which is too good not to be true, on some level. Especially when talking of the federal budget, where billions,let alone millions, can indeed be lost in the trillions which now make up our financial accounting, it’s easy for the regular citizen to be lost in the maze of numbers. But whatever the numbers are, the fundamentals of good book keeping remain. Except in times of war, our country has usually tried to maintain a balanced budget and a small or non-existent debt. The two things are not interchangeable. The deficit is how much more the government spends in a given year than it takes in, while the debt is the amount it owes in total. When the economy grows, revenues increase, and the government can (maybe) run a surplus, not a deficit. But unless it uses some of that extra revenue to pay off the debt, the debt remains. There’s a problem with public debt, on a Macroeconomics 101 level, because government debt absorbs private capital which could otherwise be used in the private sector for further growth.
Of course, not all government spending is bad, and not all private spending is good. Some government spending is incredibly effective in promoting economic growth. Things like the interstate system are used by all entities from corporations to private citizens, and could not be supplied by the private sector at anything like the cost the government “charges”. Other things, like our health care system, while private, are bloated and inefficient and provide comparatively bad service with bad outcomes, compared to international norms.
Still, all other things being equal, a government which has no debt and which does not run a deficit is better than what we’ve got now, which is a federal government that does the opposite. But there’s another sector which is where actual services are rendered to actual citizens where the debt-deficit equation hurts: locally. In states and municipalities, we have seen a bullwhip effect with regard to revenues,funding and spending. California is the most egregious example.
This bullwhip effect is common in systems where there are many steps between input and outcome,separated by time. Typically used to describe logistics failures, it describes the situation where, say, a factory suddenly is ordered to increase production for the quarter to meet a sudden surge in orders. The factory increases production by ordering more parts from a supplier, who may, in turn order parts for those parts from a third supplier. Each of these steps takes time as first the factory gets the order to increase production, then orders more parts from the secondary supplier, and so on. The problem is that by the time the entire supply chain has ramped up for the new, higher level of production, there may be a change in demand. Suddenly the new higher level of production is too much, and the factory slows production. But the second, third and other suppliers are still providing parts at the newer, higher, level. Parts that can’t be used pile up. This is inefficient, and explains why logistics is so important in any kind of manufacturing.
Something similar happens in government spending. When times are good, citizens and governments, both local and national, feel they can do more. Public employee pay and pensions are raised, plans made for new infrastructure, schools and clinics planned and built. Or we might go to war in foreign countries without raising taxes (Which is suicide from an economics perspective). These are typically projects which have long tails in terms of time. A school or a light rail extension might take a year, or years, to build, for instance. Pension promises must be funded as long as the (ex-) employee is alive. Wars drag on unpredictably. And so on. So the good feeling people act on when times are good has bad consequences when times are bad. Suddenly, if revenue falls, the projects must still be built, the pensions must still be paid, and soldiers overseas must still be provided with ammunition, food and fuel. But then suddenly the revenues aren’t there to support the commitments made earlier. So the government runs a deficit. It’s simpler for the federal government to do this because it prints the money, after all, including the treasury bonds which are the main IOUs of government debt. But state and local municipalities can’t really do that as easily. They may try to raise money through bond issues, but have to pay a high(-ish, at best) rate of interest. Which means less funding in the future, even if revenues go up, because part of that new revenue can’t be used for nice things like more pay for police, parks or new schools, but just to pay off debt.
We have had two bubbles in our economy in the last decade and a half. First the internet bubble, then the housing/finance bubble. In both cases both ordinary citizens and governments mortgaged the future against current plans based on the assumption that the bubbles would continue. The Dow would hit 36,000. House prices would keep going up forever. Needless to say, neither occurred. Instead the hucksterism at the heart of both crises caused economic contraction. That would be the normal ebb and flow of economic life except that the government still has to pay for promises made in that spirit of giddiness. Corporations have responded by slashing spending, killing their pensions and other benefits to employees, and circling the wagons when it comes to investment. They can do this because they have, basically, no responsibility except survival. Not so for government.
What’s the solution?
Citizens have tried to shackle government’s impulses in spending by enacting,in many states, a requirement for a balanced state budget. It’s an idea, but it ignores the fact that citizens still demand services at a higher rate than what they’re typically willing to spend through taxes. At the same time external factors can distort government spending. Two examples : first, rich Americans used to see a high tax rate as a sign of social success. In the 1950s there were even advertisements for luxury items which explicitly appealed to those paying over 50% in income tax, appealing to the snobbery of someone so successful they could contribute a greater share to the greater good. The fancy term for this is a sense of noblesse oblige. That has, especially since the counterculture backlash of the 1970s and 80s, been almost completely destroyed, and the richest Americans typically now lobby government for ever decreasing taxes on themselves. Because they have the money to back their views, and because we don’t have a public system of campaign finance, their views are disproportionately influential. This anti-tax rhetoric isn’t just limited to rich individuals, who may in any case not be but a smallish segment of possible tax revenue for the federal government. It seeps from that lobbying into other sectors and is especially corrosive on the state and local level. This is where taxes on rich individuals and locally-based companies makes a disproportionate difference. Parks, schools, pensions, all are to a great degree affected by falls in local government income. Now, not all government spending is good, and just because somebody works for government doesn’t make them a saint. But because we do live in a democracy, however imperfect, government does (well, should) respond to citizens. But citizens can’t have it both ways. They can’t buy into anti-tax rhetoric (Which is especially weird when it comes from people who aren’t wealthy themselves and get far more out of government than they pay in), and yet complain about lack of services.
Our continual attempts to buy votes both by giving people services they want and yet not funding them with higher taxes is unsustainable. Both major parties in this country are complicit in the problem, although one is far more unreasonable on the subject than the other (Where’s that elephant in the room?). On the level where it affects us as ordinary citizens though, we have to share the blame. The politicians are only giving us what we’re asking for after all, stuff we want to have but don’t want to pay for. Until the wealthiest and most influential among us stop taking their good fortune for granted and start feeling some sense of common responsibility, and until all us others start demanding fiscal realism, rather than platitudes and promises, the system won’t change. It’s unfortunate, because safe streets, good schools and pleasant parks benefit us all far more than they cost. A company that orders far more items than warranted by demand, or that continually miscasts inventory soon goes bust. That isn’t usually the case for government, local or national, but the costs of not having a sense of fiscal discipline are real. They’re just pushed into the future.
Is there a solution? Sure. Taking money out of elections and simplifying corporate taxes would be a start. In the first case, a bad manager couldn’t save his or her position by buying support in the form of attack ads. So politicians would actually have to manage the public’s finances or get called to account by voters. In the second case, we wouldn’t have a system where investments are steered more by quirks of the tax code than economic sense, which would boost GDP, create more jobs, and all the other good things that ensue when capitalism actually works like it should.
There are other things we could do to fix the wrongful way we deal with fiscal matters, but those are two pretty good places to start. Are they likely, though? That’s a subject for a whole other essay.