Chest Beating on Federal Deficits

Chest Beating on Federal Deficits


Flash: U.S. red ink tops $1trillion,
though June tally in decline

This is a headline on a story in today's newspaper. One can now expect this to lead to another round of chest thumping from those who call for an end of federal deficit spending, pointing to how states have to balance their budgets and/or how a family has to live within its means. The fact is that such fiscal restraint is largely mythology.

Most states are required to balance only a part of their budgets and a few states don't even have to do that. If required by state constitutions, statutes, or judicial decision, states only have to balance what is commonly called the general fund which covers the day-to-day operating costs of the state such as salaries of state employees, health care, education and so on. Revenues for these expenditures come largely from income and sales taxes. And even then the operating budget is often balanced by not setting aside sufficient money each year to pay for future retirement obligations or delaying tax refunds and other deferable costs until the next fiscal year. But states have a second set of expenditures--the capital budget. To the extent that the capital markets smile on them, states borrow money for their capital budgets, the money going for long-term investments such as office buildings, land acquisitions, their share of road and bridge construction (a large share of the last item coming from the federal government). Thus state spending is not balanced at all; it is significantly funded with borrowed money.

The federal government, on the other hand, isn't able to divide its spending into operating and capital costs. It basically has a single budget, although there is a long history of so-called off budget spending for such things as wars to reduce the annual deficit. Thus, whether the federal government is spending its money on federal employee and military salaries, health care costs, combat ships, warplanes or various payments to state governments for education, medicaid, or stimulus projects, it all goes into a single budget. Without the advantage of having a separate capital budget for long-term investment spending, the federal annual deficits can be huge, giving deficit hawks a huge opportunity to blast the federal profligate spending. And this doesn't even take into account the contentious issue of federal borrowing from its own trust funds such as social security to fund the lots of things other than social security payments.

Now for the household. The family operates in a similar fashion to the federal government in that its long term investments such as the mortgage and family car are paid along with food, utilities, etc., out of the family revenue stream-- the paycheck. (In public finance vehicles are commonly funded through the annual general fund but sometimes are shifted into the capital account and treated as long term investments so the general fund can be balanced.) Thus, it can be argued that the family does live within its means. But for a large number of families, there is significant deficit spending through the credit card. If the monthly credit card balance is paid in full, it is living within its means. But if for a variety of reasons the paycheck doesn't afford full payment, the carryover balance adds to its future obligations, boosted significantly through the interest rate on the balance. Also, according to many reports, families are often using the credit card to pay for large, unexpected medical costs, thus putting them into financial jeopardy.

So before the budget/deficit hawks get off another round of chest thumping triggered by the daily news headlines and/or their political need to get re-elected, they should think about the fallaciousness/hypocrisy of their oratory. But in this age of political hyperbole and "to the barricades" protest, one should have limited expectations for accuracy and reasonableness.