Debt Can Be Good in Government

There is a benefit in comparing the American government to a family, a comparison that has become one of the most common arguments against deficit spending. But even if you disregard the massive differences between the budgeting process of a family of four and a government that represents the interests of hundreds of millions of people, the analogy fails on a more fundamental level: Many times it is an extremely good idea for a family to go into debt.

People take out mortgages to purchase homes, starter loans and venture capital when they start businesses, and student loans when their children go to college or graduate school. A society where every family balanced its budget on an annual basis would look very different from the one we live in today.

Opponents of government spending like to portray it as a wasteful indulgence, but while it can “crowd out” private investment when the economy is booming, often that is not what is happening. American households are de-leveraging and spending less money, resulting in a drop in consumer spending and less demand for goods and services. Companies, seeing little reason to expand in a market where demand is weak, have been stockpiling excess cash instead of expanding.

In this climate, cutting government spending just further reduces demand and creates a vicious downward spiral. If governments lay off employees, those employees cannot spend their paychecks, meaning less revenue for companies, which in turn means less taxable revenue for the government.

According to basic economic theory, governments should smooth out the fluctuations of the business cycle by increasing spending during a recession and then cutting it back during a boom. Balancing the budget on a yearly basis would have the opposite effect.

What makes this pro-cyclical thinking particularly dangerous is the nature of the current recession. Since the collapse of the housing bubble in 2008, America has been in a “jobless recovery”. While GDP and corporate profits have recovered, unemployment remains persistently high. 

Losing a job can be as traumatic as losing a family member and long-term unemployment can have long-lasting psychological consequences on mental health and well-being. Even worse, the longer a person is out of the workforce, the more difficult it is for them to re-enter it. Economists have already warned that recent college graduates could become a “lost generation,” as those who graduated into recessions much milder than the current one took over a decade to get their earnings and careers back on track.

The youngest members of the work-force have faced the brunt of the downturn: The unemployment level among Americans aged 20-24 is 16.6%, significantly higher than the rest of the population. While Washington has been consumed with the long-term deficit, the real crisis in this country is the growing number of long-term unemployed. 

To return to the household analogy, the current push towards austerity measures is akin to a family's deciding not to send their kid to college because one of the parents gets laid off. While it might save money in the short-term, the real problem lies down the road: Who is going to pay for mom's and dad’s retirement if the kids never get the chance to start careers?

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