One of the more insidious of fiscal conservative talking points is the notion that the federal government should manage its budget as if it were a household. Without getting into the accounting minutiae, this sort of argument assumes that all federal expenditures are simple capital outlays and that the government does not invest in anything that enhances the well being of the country. A person might be philosophically disposed to think this way, and to argue either that the government shouldn’t spend a dime on anything or that it should invest only in certain sectors and industries. But to say something along the lines of “government shouldn’t add to its debt because you wouldn’t run your household that way” is junk.
Matt Yglesias paints what I think is a useful — and fairly alarming — analogy that exposes the error in this thinking:
Think not about a household, but a firm. For example a leverage buyout firm like Bain Capital that Mitt Romney used to run. When Bain was founded, it had no debt — it was brand new. But it right away set about to indebt itself. Indeed, piling on debt is integral to the whole private equity business model. First you go out and raise some equity capital from investors, and then you go to a bank and raise a bunch more money by borrowing it. If your firm grows and thrives, the nominal aggregate debt load will keep going up and up. That sounds insane until you remember that Bain isn’t just borrowing money to throw wild cocaine-fueled parties. It’s buying companies. On the one hand, you add a bunch of debt to the liabilities side of the balance sheet. On the other hand, you add a bunch of companies to the assets side of the balance sheet. And the business proposition is that through some combination of management expertise and financial engineering Bain causes the average value of its assets to exceed the average value of its liabilities.
I don’t think the problem is that fiscal conservatives fail to understand the way balance sheets or private equity firms or households work; I think it’s that they have a philosophical disagreement with the Obama administration over where and how much money to spend. That’s fair, and it would be great given that it is a presidential election year for the candidates to engage in a serious debate over spending priorities. But if the disagreement is purely about different spending philosophies, then fiscal conservatives should just come out and say that, rather than dallying around with a fallacious analogy that illuminates precisely nothing about the way that governments or households run their budgets.
I think it’s fair to say that Mitt Romney and President Obama do have this kind of philosophical disagreement, and it would be reasonable for Romney to argue that the government should only spend money on national defense and safety nets for the elderly, for instance, because those are the only two areas of real philosophical importance. But instead, a lot of the rhetoric from his camp has been about how government can’t keep on borrowing and spending this way because, well, just imagine if your family kept on borrowing and spending this way. It’s effective campaign gimmickry, but it’s not going to be very hard for President Obama or anyone else to simply point out that the federal government works differently from your parent’s house. And as Yglesias rightly says, “Romney should be almost uniquely well-situated” not to fall into this trap.
Mack Lannahan 