The Ghetto Economist and Dulce on Boehnernomics

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Son – drunk, orange and stupid is no way to go thru life“.
Dean Wurmer, if he’d had John Boehner as a student

If you haven’t already heard it, you’ll soon be hearing this or some variation on it:

If we have to balance our household budget-the federal government should too!”

It’s the type of statement which makes sense to people not conversant with a particular subject,but in reality it’s an incorrect comparison. A household or a municipality has to balance its budget,if spending exceeds earnings it must borrow or sell something to remain solvent.

The US economy has both a public sector and a private sector.

The federal government is different. Let’s leave the ability to create money to a different post and instead discuss why such a comparison is invalid. Your household checking account is basic double entry bookkeeping. Debits/Credits or Assets/Liabilities. The federal government has these too but it must be viewed as a part of the economy as a whole.

Our economy has a public (govt) sector and a private sector and a foreign sector. All three spend dollars (USD) into the economy and save USD out of it. The combination of all three sectors spending and saving nets to zero. So there is an analogy, but govt fiscal policy is only a portion of the economy rather than a separate entity.

We have a trade deficit with the rest of the world. More USD are going out thru purchase of imports than are coming into the economy via export. We also have a deeply indebted private sector, households and businesses are repairing their balance sheets by paying down debt, and maybe saving up a nest egg. So there is considerably more USD being saved out of the economy than being spent into it.

With the private sector in deficit, the only way to get the USD necessary to maintain aggregate demand for goods and services is by govt spending. Should we attempt to balance the budget, we would have to curtail spending, increase federal taxes, or a combination of the two.

Curtailing spending and increasing taxes would both take USD OUT of the economy. That would force the private sector to take on additional debt. The alternative would be for the economy to shrink.


Federal Government deficit spending is the only way to enable the private sector to pay down its debt
.

Republicans have been calling for a stop to “Out of control” federal spending ever since Democrats took the Executive.

Stupidly, Democrats neither explained not defended their policy. Had they taken the initiative to clearly explain fiscal policy and deficit spending, not through the occasional column in an economics journal but on talk shows and interviews, had they pounded away at their talking points the way Republicans do, most Americans would have seen the logic and it would have put Republicans on the defensive.

Republicans would have been forced to explain to the American people why they opposed policy intended to maintain the economy while households and businesses repaired their balance sheets.

Automatic stabilizers are the largest part of the deficit.

Ultimately our economy will grow again. When it does the deficit will shrink. Employment and private sector spending will rise, both increasing tax revenue. Automatic stabilizers (unemployemnt insurance,food stamps) will drop, also decreasing the deficit.

The Ghetto Economist and Dulce both insist in the strongest possible terms that “orange” is not “calico”.

About Post Author

Carol Bell

Carol is a graduate of the University of Alabama. Her passion is journalism and it shows. Carol is our unpaid, but very efficient, administrative secretary.
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13 years ago

Economics can be quite complicated and I thank you Oso for putting down an explanation of the nature of the beast. It’s not like “balancing your checkbook” but more like a fiscal control used to regulate the economic health.

If the Republicans were to get their wish with the present state of the economy, the recovery, (slow as it is), would come crashing down very rapidly.

A very good link to the General Accounting Office (GAO) explanation of Federal Debt and the economy.

http://www.gao.gov/new.items/d04485sp.pdf

Another great one from the Dulce!

13 years ago

This info is something you and I have known for quite some time and in a saner world could be easily explained to the masses. However, the other side of the aisle has only one goal and that is to rid the country of Obama, the country be damned.

Stimpson
13 years ago

Another excellent post, Oso and Dulce. Thanks for droppin’ that knowledge on us.

13 years ago

The fact that people do not understand economics (me included) is the main reason Republicans can get away with their cries of “wasteful spending.” Their motives for cutting spending are to “starve the beast”. The beast being entitlement programs like Social Security, Medicare, Medicaid and several government departments such as FEMA, OSHA and perhaps Education.

13 years ago

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