Simplistic Slogans and Real Consequences: Republicans’ Calls to Run Balanced Budgets Are Based on Meaningless Bromides, Not Sound Economics

Posted in: Tax and Economics

Legions of economists have spent decades trying to get politicians to understand a simple truth: It is not only acceptable for governments to borrow money on an ongoing basis, but it is—in good times and, especially, in bad times—exactly the right thing to do.  The problem is that this basic truth is counterintuitive to many people, and politicians are all too willing to pander to people’s gut-level preconceptions.

Lately, Republicans have been making a great deal of noise, claiming that they are the party that stands for fiscal responsibility.  In the aftermath of being soundly defeated in the 2012 elections, they have intensified their supposed commitment to budgetary rectitude.  They have scrapped their previous claim (as baseless as it was) that they would balance the federal budget within the next twenty or thirty years, and they have recently unveiled a new plan that promises (with even less basis in reality) to balance the budget within ten years.

In my Verdict column last week, I took aim at Republicans’ claims that they favor balanced budgets for “principled” reasons.  In particular, their cries about the supposedly dire consequences of debt for “our children and grandchildren” turn out to be crocodile tears, in light of the party’s willingness—indeed, its eagerness—to take funding away from federal programs that help real children, today and in the future.

Despite their lack of any coherent reason for advocating balanced budgets, Republicans continue to stick to their talking points about how important it is to rein in the federal government’s supposedly “out of control spending,” and similarly baseless claims.  When those talking points are closely examined, however, the Republicans’ arguments in favor of budgetary austerity amount to nothing more than excuses to redistribute income upward.  Republicans are simply using anti-deficit rhetoric as a way to fool people into adopting their damaging, regressive, and cruel agenda.

The Republicans’ Continued Budgetary Balderdash: False Promises to Make “Tough Choices”

As an initial matter, it is important to remember that the budget proposals we are seeing from the Republicans in the U.S. House of Representatives are pure fiction.  The plans from 2011 and 2012 differ from the newest plan in various ways, but they are all ultimately based on nothing more than simple assertions that their numbers will somehow add up.

For example, when Congressman Paul Ryan was unveiling the latest version of the House Republicans’ budget earlier this month, he was asked how he was going to reduce tax rates (as he proposed), while also increasing tax revenues (which he claimed his plan would do).  The only way to accomplish this trick would be to eliminate “tax expenditures,” which are the tax breaks that reduce total tax revenues by over a trillion dollars every year.

Anyone who followed the 2012 Presidential elections knows that the Romney/Ryan campaign assiduously refused to say which tax expenditures they would be willing to eliminate. And no wonder. The biggest ones—the mortgage interest deduction, the exclusion of health insurance premiums, and retirement savings incentives—are all enormously popular with Americans.  With the election over, is Ryan now willing to be specific? Absolutely not. Referring to the House committee that writes tax bills, Ryan replied: “Yeah, so this is what the Ways and Means Committee is going to do.”  The tough choices, apparently, are someone else’s concern.

The Republicans’ claims that they are making “the hard choices,” and “facing up to fiscal reality,” therefore, are—as Vice President Biden memorably said to Mr. Ryan in their debate last October—“a bunch of stuff.”  They would cut tax rates now for the wealthy, making budget deficits rise, and then attack anyone who later actually tried to “increase taxes” by reducing or eliminating tax expenditures.

The Problem Is Not That Republicans Are Dishonestly Claiming That They Will Balance the Budget (Although They Are), It Is That Budgets Should Not Be Balanced

Even though the Republicans are not proposing to balance the budget, some might argue that this merely means that we should find someone else who is willing to do “what needs to be done.”  That, however, would be exactly the wrong approach.  The U.S. has neither a debt problem nor a spending problem, and politicians on both sides of the aisle need to stop talking about borrowing money as if it were a sin.

The impulse to condemn borrowing is, however, deeply held.  Shakespeare admonished, “Neither a borrower nor a lender be,” and we constantly hear that we must “tighten our belts” in tough times.  Even though it is possible to take on too much debt, however, it is foolish and harmful to take on too little debt—especially for national governments.

Consider how businesses manage their finances.  Even though we constantly hear from Republicans that the federal and state governments should “be run more like a business,” the fact is that almost every well-run business takes on debt without ever planning to reduce its debt level to zero.  A growing business grows because it takes on debt (and spends the borrowed funds to expand the business), and that growth, in turn, allows the business to handle its interest expenses.

Most corporations even have financial departments devoted to “debt management,” which make plans regarding how and when to increase debt levels.  Note that this is not debt reduction, but debt management.  The presumption is that the corporation will always be in debt.

Even so, we constantly hear Republicans saying things like, “We just can’t borrow money that we don’t have.”  Beyond the logical absurdity of such statements—of course we borrow money that we don’t have, because if we had the money, we wouldn’t need to borrow it—the point is that even the “job creators” that Republicans love so much borrow money that they do not have.  Even so, those corporations still earn profits (in record-breaking amounts), and their share prices continue to rise.

Misunderstanding How to Measure Deficits: Even the Best News Reporters Get It Wrong

The Republicans’ talking points about deficits and debt, therefore, are pure sophistry.  They try to rally the public behind balanced budgets (but not, of course, budgets that are balanced by increasing taxes on the wealthy) by simple repetition.  Not only are Republicans proposing budgets that are deeply harmful to the middle class and the poor, but they cannot even justify their supposed goal with anything more than stale and misleading talking points.

To a surprising degree, however, this strategy is working.  Even a recent news article in The New York Times—not an opinion piece, but straight news reporting—ended its opening paragraph by saying that the Senate Democrats’ recent budget proposal would “leave the government still deeply in the red a decade from now.”  What does “deeply in the red” mean?  Later in the article, we learn that the projected deficit in ten years is $566 billion.

That might seem like a big number.  What readers were not told, however, is that our projected national income (Gross Domestic Product, or GDP) in 2023 is more than 26 trillion dollars, and our GDP will be growing at a rate of more than four percent each year.  That means that the deficit in that year would be less than 2.2%, as a percentage of GDP, a number that would be more than good enough to prevent the debt from becoming a real problem over time.  Similarly, total national debt as a percentage of GDP would be lower under the Senate’s plan than it is today.

Deliberately or not, therefore, the press often reinforces Republican talking points by treating strictly-balanced budgets as the touchstone for fiscal responsibility.  Even though no business would commit to such a strategy, we are repeatedly told that the federal government must.

It is important to emphasize that there are many reasons why the analogy between businesses and governments is deeply problematic.  Among other things, governments are supposed to improve the lots of all of their citizens, not just of shareholders and corporate management.  But even on its own terms, the Republicans’ insistence that government “be run like a business” founders on the simple fact that businesses are not run as Republicans’ would have us believe they are.

The Political Economy of Debt: Must We Commit Ourselves to Balanced Budgets Simply Because We Have Always Thought That We Should?

Are there any reasons that the federal government should live by different, more onerous rules than any other entity?  The closest any conservative figure has come to articulating such a reason was reported in a news article a few weeks ago.  Douglas Holtz-Eakin, an economist who has advised several recent failed Republican Presidential candidates, offered this political explanation: “It gives Congress a way to say no.  Transparency and political buy-in are important, and people understand balanced budgets. It has a lot of virtues.”

As an initial matter, it is important to note that Holtz-Eakin has no particular expertise to support these assertions.  He was trained as an orthodox economist, and thus works in a field that affirmatively rejects the idea that other social sciences have anything to add to the narrow analytical approach of economics.  Holtz-Eakin did earn a reputation as an honest economic analyst when he was director of the Congressional Budget Office—a reputation that he has been squandering for several years now—but his claims about “political buy-in” and what “people understand” are simply the surmises of a person who was trained in a very different field.  He might be right or he might be wrong, but he is certainly not drawing on his expertise in making such claims.

On the merits, then, what is the claim?  Supposedly, people who serve in Congress need to resort to a dumbed-down, simplistic talking point that the person on the street can readily understand.  Apparently, it is not enough to say that debt should grow no more quickly than GDP, because that—for no stated reason—does not allow Congress to “say no.”

If the argument is that people cannot understand the truth, so that they must be told a fairy tale, then we are in dangerous territory indeed.  Fortunately, that argument is simply not backed up by evidence.

For example, even within the “Deficits are always bad, all the time” fantasy world that politicians have created, people readily accept the claims that governors balance their states’ budgets every year.  Former Governor Romney would frequently make such claims on the campaign trail, as do governors from both parties on a regular basis.  The surprising fact is, however, that what counts as a “balanced budget” at the state level is not what people think.  That is, even when a state balances its budget, revenues do not equal expenditures (which is the intuitive definition of “balance” that people find so appealing).

In fact, governors are borrowing money even as they claim that they are balancing their budgets.  How is this possible?  Because the definition of balance in the state government context—quite sensibly—excludes borrowing by states’ governments to pay for long-term investments.  (I say “quite sensibly” because excluding long-term investments from the annual balance allows a state government to improve its economy over the long term, without being chained to an arbitrary requirement to balance the budget every year.  Again, this is the standard that well-run businesses use, too.)

Even so, people have “bought in” to the idea that states are balancing their budgets, without being troubled by the fact that the states are regularly borrowing money.  If the question is a matter of what people are willing to believe, then arguments like Holtz-Eakin’s boil down to saying that we should hold the federal government to the wrong standard, simply because people argue that the federal government should be held to the wrong standard.  Maybe the better response would be to start arguing in favor of the right standard instead.

In short, the idea that we must insist that the federal government should run a balanced budget every year is not based on any sensible principle of financial management, or of intergenerational justice, or of sound economic policy.  The talking points from Republicans on this issue thus are, at best, vapid, and at worst, dishonest.  The closest one hears to an actual argument in favor of balanced budgets boils down to the claim that we should refuse to see things clearly, because we have been viewing the world through a distorted lens for such a long time.  We can do better than we have in the past, and ending the obsession with balanced budgets will allow us to improve our economic policy, now and in the future.

Posted in: Tax and Economics

8 responses to “Simplistic Slogans and Real Consequences: Republicans’ Calls to Run Balanced Budgets Are Based on Meaningless Bromides, Not Sound Economics

  1. Edward Tomchin says:

    Excellent exploration of why debt is not bad. Shame so many people don’t understand debt in a fiat economy. I’ve been trying to explain to peers that debt, properly managed, can grow any economy, but I mainly get blank stares. Perhaps it’s the fiat economy that have many people scared of debt. When I explain what a fiat economy is and that we created one back in 1971, I sometimes see some terrified faces. How much fear of ourselves is safe and how much is just plain unfounded paranoia? Being a gold bug is paranoid, but when nations do it, it’s scarier.

    I generally get a form of enlightened response when I use the comparison of government borrowing to the amount of debt a middle-class family takes on. Oh, yeah, is the most common response. It’s a rough comparison, but it gets the idea across that owing more than you make in a year is not necessarily a bad thing. We all do it, and so can the economy and come out with a profit too.

    But your comparison to a business is one I will be using in the future. Thanks for a great essay.

  2. Fhuh Kew says:

    They’re all Nazi’s demons and repugs alike. Their favorite game is war and empire and mericans(lost the A in a downgrade) are still dumb enough to wave and worship their Satanic flag.

  3. This is a pretty good analysis – except that when the budget cuts hurt the middle class and the poor, as you point out, and when the tax cuts for the wealthy continuously use deficit spending to finance more income and wealth inequality, there actually is a good reason to cut back on borrowing: Raising taxes on corporations and extremely high incomes will reduce wealth transfers to the top, and begin the downward redistribution of wealth and incomes necessary to save our economy. In the process, it will reduce deficits and borrowing. In fact, getting back to the tax levels we had before Reagan might, at this point, be the only way to avoid disaster.

  4. David1225 says:

    I suppose I should be proud that a fellow alumni was able to get an article published, even if it is mostly hogwash.

  5. Kevin says:

    Getting out of debt, or at least trying to, is always a good idea. Paying interest sucks.

  6. Brian Mahoney says:

    Well-run businesses can take on some debt provided they manage it well and have excellent credit. However, if their credit rating has been downgraded (such as the United States’ rating), then the terms and conditions from lenders are not as favorable and debt is less advantageous. A number of very successful companies such as Microsoft, Apple, and Amazon intentionally have very little debt and a large surplus of cash. Is a balanced budget possible ? – All 50 states do it every budget cycle, so it does appear to be achievable at a micro level (some reflect the macro US budget – CAL comes to mind). That being said, running two wars simultaneously, the extensive bailout operations following the 2008 financial fiasco, the new health care programs are all very expensive. Also, rather low possibility that either party Democrats or Republicans has the strength and will it would take to balance the budget.