Jason DeRusha of WCCO thought it a “Good Question” – Can Government Budget Like a Family? His good source was Jay Kiedrowski, senior fellow at the University of Minnesota’s Hubert H. Humphrey Institute for Public Affairs and Commissioner of Finance under Gov. Rudy Perpich.
“It’s a simplistic metaphor, but it can be very misleading,” Kiedrowski said, and I got interested. I couldn’t agree more. “Families and government need to plan for the future budgets. They need to show discipline in sticking to guidelines,” he said. So far, so good. Kiedrowski went on the make these points:
- A family can’t make use of deficit spending.
- Individuals do not have ongoing capital expenses.
- Families aren’t limited to spending cuts; they can “raise revenues” by working more hours or taking a second job. Government can raise revenues by raising taxes.
- There are no ripple effects when an individual cuts spending. When government cuts spending, the effect is felt across the country and the world.
Wow. That from a former Commissioner of Finance? Not only are the above statements economically dubious, Kiedrowski leaves out the fundamental difference between family budgeting and government budgeting – the little distinction that families have unlimited possibilities while government is limited by constitutional restraint.
Quickly let’s look at Kiedrowki’s points.
Families and individuals do make use of deficit spending; they call it “borrowing” because there is an expectation that it will be paid back. Economists tell us that over our lifetimes our consumption level remains fairly stable while income varies. Just starting out in life, we spend more than we earn, borrowing for things like education, first cars and first homes. In mid-life we borrow for those “ongoing capital expenses” Kedrowski doesn’t thing we have – the new roof on the house, the unexpected auto replacement, adding a room addition. Later in life, living on fixed incomes, we again spend more than we earn, relying on savings rather than debt to cover the difference – which brings us to Kiedroski’s revenue issue.
Families cannot simply “raise revenues.” They can certainly pursue that option, but individuals do not have the power to force their employers to provide overtime or to force someone to hire them part-time on weekends because they have a “revenue shortfall.” Government has that power. A legislative vote, a governor’s signature and “Presto!” instant revenue.
Drawing a link, which Kiedrowski ignores, when government chooses to raise taxes to pay for its revenue shortfall, it makes it more difficult for individuals and families to pay back the loans they assumed to get ahead. Legislating people into a higher tax bracket punishes education, saving and upward mobility.
Finally, claiming that there are no ripple effects when individuals cut spending, including reducing spending because of tax increases, begs the question, where does government get its money?
Government cannot create wealth. Government cannot spend any amount unit it first takes it from productive citizens. This is a classic case of the seen versus the unseen: The consequences of massive government spending are easily seen; unseen are the negative consequences of revenue that went to government projects instead of to other areas of the economy were the money left with individuals and families. The same on the spending side: the consequences of a million people spending a $100 on myriad things they need is difficult to see; a $100 million government project is a ribbon-cutting opportunity, regardless of its usefulness.
After all that fuzzy economics, Kiedrowski misses the main reason the metaphor doesn’t work – governments and families have different obligations and potential. The phrase “government should live within its means” is most dangerous. It implies in good times, government can do more. That is not the case. Government has specific constitutional obligations, which ought to be fully funded, but it is limited by constitutional restraint not to exceed those obligations. If government has more revenue that it needs in good times, then it is over taxing, not experiencing an opportunity to increase services.
WCCO posed a good question; Kiedrowski provided a less-than-adequate answer.
Craig Westover is a Senior Policy Fellow at the Minnesota Free Market Institute.