Sunday, July 31, 2011

Should Gov't "Live Within Its Means"?

One ubiquitous political sound bite in the U.S. nowadays is that the government should "live within its means," and it is frequently compared to a U.S. household.

Comparing the federal government to a household is misguided.

A household obtains revenue for the purpose of procuring its needs for existence and that also, largely, determines what a household spends.  Furthermore, the budgeting of any individual household does not directly affect the finances of its neighbors.

A state is not a household.

Not only does a state appropriate and expend wealth, but these and other actions determine the value of its currency and assets as well as the level of demand, both domestically and globally.  I have written previously about how the existence of the state is primarily as a tool of cultivating regional boundaries for the uneven development of prices and wages.  Such unevenness is necessary for capitalist profitability.

The primary purpose of U.S. government spending the past few decades has not been to fund government programs.  It has been to inject demand into a global economy faced with a crisis of overproduction.  Whether this is a wise strategy or not, U.S. deficit spending has almost single-handedly kept the entire global economy afloat.  When the U.S. tried to reverse course in the late 1970s and early 1980s, it precipitated a massive Third World debt crisis that threatened to undermine the entire world economy.  So Keynesian deficit spending was resumed.  Likewise, Clinton's austerity measures in the 1990s ended with an East Asian financial crisis that started to snowball out of control and necessitated a bailout by the U.S.  (Furthermore, all the effort to balance the budget amounted to nothing in the long run...)

One can argue that the situation of the past few decades, in which the U.S., for the most part, (and someone at all times) played the role of deficit-spender, is neither ideal nor effective nor sustainable.  And I would tend to agree, myself.  On the other hand, those who propose to drastically reduce government spending in order to balance the budget must not take such a myopic view of the economy and realize that such a decision could be accompanied by dramatic consequences, including deepening economic crisis.  At the very least, be prepared!

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