I know, from your feedback, that many of you struggle with what you’d otherwise consider commonsense: that spending beyond means, when undertaken in seeming perpetuity, has to end badly. The struggle of course is not that such rudimentary logic applies to individuals or private institutions, but to what extent, if at all, it applies to governments. We who think it indeed applies to governments are labeled, by those who don’t, everything from dogmatic to downright cruel.
The great general theory states, in essence, that we can consume our way to prosperity. That ramping up government spending during contractions is a must to offset the reduction in consumption. The great theorist, John Maynard Keynes, when pressed on the potential long-term problems that would evolve from such policy, quipped “in the long-run we’re all dead”.
To be fair, while Keynes indeed advocated deficit spending during recessions, he also advised, the above quip notwithstanding, that budgets should be brought back in line during expansions. We can analogize to a typical family experience: The oldest son, having a family of his own, loses his job. His parents, not wanting to see their grandkids wanting, step in and support him till he’s back on his feet. The young family, by the grandparents’ grace, goes right on consuming. Their son ultimately lands a new job and upon receipt of his first paycheck calls mom and dad and says “thanks, I’ll somehow pay you back, love you!” The folks, no longer having to keep their son afloat, can now plan the float trip across the Mediterranean that they put off to help junior and his family. Of course my analogy doesn’t really fit: Because the folks actually had the money—they didn’t have to borrow to help their son—although, prudent as they were (which is why they had the money), they delayed the cruise so as to keep their fiscal house in order. That’s not quite reality when we’re talking government spending.
A somewhat more apt analogy might be one where the folks are barely getting by themselves, and, by the grace of their good credit rating, borrow to help their son. They do it out of obligation, yet they pray that somehow their son, once back in the workforce, will earn enough, and be frugal enough, to someday pay them back. The problem with my somewhat more apt analogy is that frugality is not what government would have the recipients of its largess practice—quite the opposite in fact. A la Keynes, it’s meant to be spent.
Of course you don’t need a PhD in economics to determine that when we’re talking about families the latter example is a recipe for fiscal disaster. So why should we believe that it’s any different for governments? Well, frankly—as present-day Europe strongly suggests—we shouldn’t. That said, there are many who hold PhDs in economics who would have you believe that it is indeed different for governments. Here’s one—he’s a Nobel laureate to boot—making that case.