Federal deficits don’t work like credit cards

The Joe Biden administration has pledged to deploy fiscal stimulus to get the stricken US economy back on its feet, as well as increase government investment to boost long-run growth. This means the Republican opposition in Congress is back to arguing that austerity is the best way to compensate for the economic damage done by the pandemic.
Even before the election, I wrote about the need for more government spending — a lot more — to hasten a post-Covid recovery. With a Democrat now in charge, fiscal conservatives will be hitting hard on the claim that it’s irresponsible to deepen the nation’s already-hefty debt. So it’s more important than ever for people to understand why some of the more emotionally appealing of those arguments are specious.
Two common pro-austerity refrains, for instance, are that the government should stay out of debt like a prudent household, or be run efficiently and profitably like a business. But the federal government is a unique entity, with different objectives and more borrowing capacity than any private entity — or even state governments.
Let’s debunk the business analogy first. Political candidates, especially conservative ones, sometimes vow to run government like they would run a company. And there are some ways in which experience from the latter sphere can absolutely be applied to the former, usually in the realm of operational efficiency. But there are more important ways that the government isn’t like a business. The biggest is that a business is beholden to shareholders, while government is beholden to the public good. If a company consistently fails to make operating profit, it’s a money-losing, value-destroying operation and needs to be shut down or reorganised. But government doesn’t exist to make a profit; when a government service loses money, it can still be worth it if it improves things for the public overall.
For example, when government spends money on basic research, it typically doesn’t capture the monetary value that research creates. But the eventual economic benefits, which are reaped by companies downstream of government-funded research, tend to vastly outweigh the cost. The government doesn’t need to be the one that gets paid, as long as society gets paid. The same is often true of environmental cleanup, road networks and anything with a positive externality.
It also applies to fiscal stimulus during recessions. Even if the government doesn’t recoup the full cost of emergency spending programs in terms of increased tax revenue, the economic activity generated by stimulus often outweighs the costs. In the long term, the government can run deficits forever, as long as the economy grows faster than the debt. In the short term, it can run up debt even faster than that and still be OK, as long as it’s a temporary thing — like Covid relief, or the stimulus in the Great Recession. All of this is very different from how a business operates.
Another myth is that the government is like a household. Politicians worried about deficit spending sometimes liken it to people relying too heavily on their credit cards and demand that the government live within its means.
—Bloomberg