No. The government should NOT run its budget like a family does.

I’m tired of hearing people say, “The Federal budget should be run the way my family runs its budget!” Often followed by, “If my family doesn’t have the money to buy something, we tighten the belt until we do. The Federal government should do the same thing!”

That’s a great argument, but a crappy policy.

These days, people are twigging out over debt for one of two reasons. It either suits their political desires – maybe they want a terrible economy as long as a Democrat is in the White House?! Do ya think?! – or they keep thinking of government debt in terms of personal debt.

Personal finances and government finances are two different critters. You and I make our money from external sources, and then spend our money on external parties. Money comes in from outside (our jobs), and it flows to the outside (our expenses). But the Federal government doesn’t roll like that. A government makes money from itself and spends money on itself. As a result, what’s good for our family pocketbooks is completely different from what’s good for the nation’s pocketbook.

Slashing spending won’t actually reduce debt. Because when the economy is depressed, that slashing also reduces income. Government is like a husband who works for his wife, and buys merch only from his wife. There are no other sources of income and no other expenses. What happens when the husband needs to spend less? The wife receives less money from his purchases. This means she has to cut his salary. This means he has to reduce his spending further. So the cuts create a vicious cycle. Lather. Rinse. Repeat.

Hey Greece, how’s that belt-tightening workin’ out for you?

Even though they claim the Democrats do this (projection much?), Republicans are the ones who spend like drunken sailors when they’re in charge. But that doesn’t mean we should slash spending now. That just means we shouldn’t trust Republicans with the checkbook.

The US constantly pays off debt and issues new debt. And the word on the street is that the market wants LOTS more debt. We’re at incredibly low interest rates. Inflation-protected debt is literally paying a negative interest rate. Give the US government $100, get back $98, and investors are still buying it up. If people stop wanting to buy our debt, there would be large problems as we’d have to pay out higher yields. But the market loves American debt so much that they’re willing to lose money to buy it.

So no, we shouldn’t run the Federal budget the way we run our family budget. What we need to do is prime the pump. Spend more now, incur more debt, stimulate the economy. Then once the economy is humming along nicely, we cut spending when we can absorb the cuts.

(Inspired by the good folks at Democratic Underground.)