Thursday, May 23, 2024

Econ 101: On Federal Spending And Flawed Analogies

One of the best parts of having a blog — along with the international fame, untold riches, and scores of supermodels — is the ability to jump into other people’s online conversations, even when no one actually asked your opinion.  So it was that I decided to chime in on something that I read yesterday.

First, John Brummett wrote this post detailing John Boozman’s positions vis-a-vis deficit spending to help Arkansans.  In response, Jason Tolbert wrote this post in which he analogizes between Federal government deficit spending on unemployment benefits and a fictitious family spending beyond their means to acquire things like new golf clubs, roses, expensive dinners, etc.

His column makes me think of a fictional story with the made up but all too real Smith family. In this family, Mrs. Smith is the one who is responsible for paying the bills and balancing the checkbook each month. She tells Mr. Smith that she is troubled by the fact that each month they are spending more than they make and therefore the credit card debt is way out of hand. “We must cut back,” she tells Mr. Smith, “or we will be in serious trouble.”

Mr. Smith agrees and admits it is probably his fault for spending too much. But the next day he comes home with a dozen roses for Mrs. Smith to apologize. She thanks him but insists they really must cut back. “No problem,” Mr. Smith says.

But a couple afternoons later Mrs. Smith gets a phone call from Mr. Smith saying don’t worry about dinner tonight because he wants to take the family out for a night on the town. Mrs. Smith knows they don’t have the money but she really could use a night out so she reluctantly agrees. They dine at their favorite steak place and take in a show. Mr. Smith promises to cut back.

But what you know, the next week Mr. Smith pulls in the driveway with a brand new car. He explains that he is worried about Mrs. Smith’s car which is almost ten years old and could brake down in the middle of nowhere leaving her stranded with the kids in the backseat. Mrs. Smith admits he has a good point.

At the end of the month, Mrs. Smith can’t believe how high their credit card bills have now gotten. She just happens to notice several charges for a new set of golf clubs, several expensive lunches, and a monthly payment notice for not only her new car but also a new pickup truck. Funny that Mr. Smith never mentioned these expenses when he was doling out the gifts.

You get the point. It is an election year and Sen. Lincoln is back in Arkansas bearing gifts. Brummett is probably right that this will cause the polls to tighten as people tend to like their own pork.

But the question remains if Arkansas voters are going to finally be feed up with the national debt growing at an average rate of  $1 million per minute or are we going to get serious about reducing our federal budget?

Cutting spending is not fun but we all have had to do it and can sympathize with the Smith family’s dilemma. No one wants to drive a ten year car but eventually we have to balance our personal finances or face bankruptcy.

So next time Sen. Lincoln announces that million dollar project for your community, don’t forget that you and your children will be the ones paying for it.  If we really want to reduce federal spending, we better stop getting so giddy about the goodies our politicians bring us home.

Tolbert’s post prompted Blake Rutherford to write this post in response, noting the absurdity of suggesting that unemployment benefits are somehow akin to the Smith family’s luxury items when there simply aren’t enough jobs available.

In his post, Mr. Tolbert explains his position by way of an analogy of a fictional couple he calls the Smiths who spend lavishly on new cars, golf clubs, and expensive dinners out when they don’t have the income to support it. This, Mr. Tolbert opines, is irresponsible. And he would be right. But his example is misplaced in the context of this argument.

Here’s what I mean: For Mr. Tolbert’s argument to make sense we have to assume one thing: that the deficit spending we’re conducting now is on matters considered to be a luxury.

Let’s consider the luxury issue to consider spending in the context of unemployment benefits. Republicans, including Mr. Tolbert and Mr. Boozman, oppose the extension of unemployment benefits because it will raise the deficit. In the process of making this determination, they argue that people that are out of work don’t deserve assistance. “Continuing to pay people unemployment compensation is a disincentive for them to seek new work,” said Arizona Sen. Jon Kyl, a Republican. Rep. David Camp, the ranking Republican on the House Ways and Means Committee described it as “reckless spending.”

In order to buy Mr. Tolbert’s argument you must adopt Mr. Kyl’s viewpoint: unemployment benefits make people lazy. Still, let’s consider it. Currently there are five unemployed persons for every job. In a story on National Public Radio this morning, a woman admitted to applying for a job as an administrative assistant only to learn than job elicited 350 applications. What this means is that there aren’t enough jobs. Thus, when Mr. Kyl says that unemployment benefits make people lazy, there’s a scenario (e.g. when the economy is booming) where he could be right. But that scenario isn’t today. The result is that out-of-work people become even more desperate for jobs, unable to pay their electric bill or buy groceries at the supermarket.

Following Blake’s post, @tolbertreport and @blakerutherford carried the debate over to Twitter.  The gist of that discussion was that Tolbert didn’t necessarily mean luxury items — “replace golf clubs in example w/ getting a new hot water heater or replacing a set of bald tires – my point is the same” — and that he favors creating jobs over extending unemployment benefits, while Blake countered that Tolbert’s post didn’t actually address reducing the deficit (it only complained about the spending) and that unemployment benefits merit spending in the current economy.

All of which, finally, brings me to my point in writing this post.

I agree with Blake (not surprising), but I would go further: I don’t think the luxury-item distinction is the only reason that Tolbert’s premise is flawed; the entire post is based on two fundamentally incorrect assumptions.

The first problem with Tobert’s argument is the idea that a single family and a federal government should operate under the same constraints. Common sense says that this is not correct; the government’s ability to borrow is not tied to a finite number as the family’s access to credit is tied (in theory) to their monthly income.  While neither entity has infinite credit, the government does not face a realistic scenario any time soon where there is simply nothing left to spend.  This may be either good or bad, depending on your political bent, but it pretty much kills any notion that Mr. and Mrs. Smith and the U.S.A. are subject to the same rules.  Heck, forget rules; the Smiths and America aren’t even playing the same sport when it comes to spending.  (To the extent that Tolbert is implying that the U.S. should operate under the same limitations that a typical American family faces, he fails to give any explanation as to why that is so.)

The second flaw with Tolbert’s position is his assumption that continued deficit spending would affect the U.S. in the same way it affects the Smiths.  Tolbert’s own admonition that continued spending today means that our children will be paying in the future illustrates why his Smith analogy doesn’t fly — bankruptcy for the Smiths, which is the most likely outcome in Tolbert’s story, means that their children would not be paying for Mr. Smith’s golf clubs down the road.

But that’s just the nitpick-y tip of this second flaw.  The real difference in end result is what the spending actually does.  Deficit spending by the the Smiths continues to make their own personal economy worse and worse, with each dollar spent having exponentially greater negative impact (due to interest, etc.) on their ability to recover.  On the other hand, deficit spending by the government is designed to improve the overall U.S. economy.  We’ve been over this part a lot lately, so I won’t belabor the point, but there is a reason that many, many reputable economists (Krugman, DeLong, Stiglitz, etc.) advocated a much larger stimulus package than was ultimately passed (due to cowardice and lack of economic understanding on the part of Congress) and continue to advocate for further government spending.  Political affiliations aside, and at the risk of sounding flippant, you’ll forgive me if I put my faith in economists when it comes to the economy rather than relying on the economic understanding of an elected body composed (in Arkansas’s case) of a farmer’s daughter, someone riding in on his daddy’s last name, an optometrist, a doctor, and a couple Blue Dog ex-pharmacists.

As I wrap up this post, I realize that there is a third flaw with Tolbert’s argument — it presupposes that we want to stop government spending right now.  Given the problems that are likely to occur in our economic recovery if we stop domestic government spending (through, say, not extending unemployment benefits) right now, using “stop spending” as some kind of shorthand for “fiscal responsibility” brings to mind the old saw about how bombing for peace is like having sex for virginity.

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