Wednesday, January 09, 2013

Government is not business

By Frank Moraes

Meet Greg Walden, the Republican representative from Oregon. He is an idiot. But he has lots of company. Like our "liberal" president. Do you remember when Obama said, "After all, small businesses and families are tightening their belts. Their government should, too." Well, Greg Walden is using the same flawed argument in his new bill to eliminate the "trillion dollar platinum coin" loophole.

He writes, "My wife and I have owned and operated a small business since 1986. When it came time to pay the bills, we couldn't just mint a coin to create more money out of thin air. We sat down and figured out how to balance the books. That’s what Washington needs to do as well."

That does sound reasonable, doesn't it? The problem is that it is totally wrong. People make the mistake of assuming a whole economy is like its pieces. But it isn't. Consider for a moment the paradox of thrift. In a family, you can balance your budget by spending less. This does not work in the economy as a whole. This is because my spending is your income. If everyone decides they are going to spend 10% less than they have been, then everyone will find that they are making 10% less than they have been. A family or business is not like the economy as a whole.

The same is true of the government. But it is a bit more complicated. If the government lays off an employee, they will save that money. But they will gain extra costs like unemployment insurance and other welfare programs. Plus, the employee will no longer being paying taxes to the government. And most of all, that person will not have as much money and so there will be less money in the economy to be earned and spent. Of course, this isn't the only or even the main reason that Walden's analogy is nonsensical.

Jonathan Chait notes this morning that businesses come and go, but governments are supposed to last. A small business that goes bankrupt does little harm to the economy as a whole. A government that goes bankrupt (or simply defaults on its debts) does an immense amount of damage. Chait goes on to take Walden's example at face value:

But let us try to take Walden's small business analogy seriously. Suppose the problem is that we're a business whose expenses are outstripping our income. We propose some measures to correct it — say, cutting expenses when possible and also working some longer hours. But we have a business partner who listens to a lot of Rush Limbaugh and has some different ideas. He says increasing revenue by working longer hours — even a single longer minute when we have customers waiting in line at closing time — is totally off the table. He says the answer is to cut our employees' pay and ban them from taking bathroom breaks. And he also informs us that, unless we approve the savings ideas he wants, with none of the savings ideas we want, he'll refuse to pay vendors who have already delivered things to us, thereby ruining our credit rating forever.

This all boils down to something very simple: silly for silly. Everyone knows that the trillion dollar coin is a silly idea based upon a loophole in the law. But it is being used to counter a silly abuse of the debt ceiling. Paul Krugman put it very well. Obama, he said, "will, after all, be faced with a choice between two alternatives: one that's silly but benign, the other that's equally silly but both vile and disastrous."

Ezra Klein, the other night on The Last Word, asked if doing this wouldn't be admitting that we now live in a banana republic where we were incapable of governing intelligently. I don't know that I would use the term "banana republic," but as long as our elected officials believe that the federal budget should be treated the same as a household budget, we will indeed be incapable of governing intelligently.

(Cross-posted at Frankly Curious.)

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