U.S. Budget Not A Family Budget

Posted: January 31, 2013

Hunter Lucke wrote that “deficits mean borrowing, borrowing means interest, soon, interest takes over the budget” (“Deficits Don’t Matter,” Jan. 17). His answer to my previous Open Forum is a good lesson for families and others that must get dollars before they can spend them (“To Understand Deficit, See Big Picture,” Jan. 5). It is not true for the federal government because it creates dollars for itself and others to use.

Many people, including most of our leaders, make the mistake of assuming that the federal government budget is just like a family budget. But unlike a family, the government, creates new dollars by spending more than it receives from taxes. This is called running a “deficit”.

International trade shows why deficits are necessary. The country now pays about $500 billion to other countries each year because it imports more than it exports. Those payments reduce the money supply, and if replacement dollars are not created, the supply will shrink every year. We have a choice. We can: 1) import less and export more; 2) let the money supply and the economy shrink; or 3) replenish the supply with new dollars. We can’t duck that choice.

If foreign payments continue at the present rate, we will need annual “deficits” of about $500 billion just to maintain the money supply, and those who insist that the government is like a family have some explaining to do. They must show how a family can create new dollars without being guilty of counterfeiting. And they must show why many of the new dollars the government creates do not just replace dollars sent overseas to cover the trade balance.
They can’t explain either because data show that one of the main uses of the new dollars the government has created in recent years has been to replace those that went to other countries. The international payments for net imports show why claims that the government budget is like a family budget are myths, superstitions, or falsehoods.

Mr. Lucke worries that interest on the federal debt will take over the budget. But how can it? The government can always create the dollars it needs to pay interest and all of its other bills by spending more than it taxes.

Or, the government could create new dollars like the “greenbacks” it issued to help pay for the Civil War that did not add to a deficit or debt. But those who control most of the country’s financial wealth would fight that because they use Treasury securities as one of the safest places in the world to store their money. And they want the interest income. To those large investors, most of whom are American, federal debt securities are assets and the government is their bank.

Disparage it as “printing” if you like, but consider the alternative. Even if America’s human and environmental needs don’t interest you, consider its infrastructure. Our roads, bridges, streets, air and rail systems, water and sewer systems, coastal ports, airports, waterways, pipelines, and electrical grids are overloaded, obsolete, and in many cases, dangerous. This past week, two major, independent reports highlighted the sorry state of our physical plant and showed how the country is lagging far behind our major competitors. They explain that meeting our infrastructure needs will require investing trillions of dollars, while failure to meet them will also cost trillions of dollars.

Upgrading the infrastructure will require steel, concrete, aluminum, hundreds of other materials, and thousands of years of work for those who need good jobs. Those ingredients can’t be “printed”, but the money to pay for them can.

To answer Mr. Lucke concisely: Eliminating deficits mean fewer dollars, fewer dollars mean a slower economy, soon a slower economy means recession, depression, and decline. Deficits mean business for companies and incomes for people.

Conservatives are at a turning point. They can conserve and pass on to future generations a strong and dynamic country like the one they inherited, or they can perpetuate mythical ideas about money and the federal budget? They can’t do both.

Mr. Parker lives in Harrisonburg.

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