Reply #28: OK, I'll give it a try but this is pretty complicated [View All]

[Prophet 451]

Firstly, tax revenues, unlike your salary, is adjustable. What I mean is, you do not (probably) have the option of simply going to your boss and demanding additional money. The government does have that option. The government can, in theory, just say "your tax rate is now X". Assuming that you have an average family, you have one, or perhaps two, sources of income and to increase those, you can either work longer or demand more cash. Government has literally hundreds of possible sources of income, all of which can be tinkered with ad infinitum.

Secondly, more importantly and the one point that makes the whole comparison invalid, because the hypothetical family CAN simply cut back on spending and bring it's finances back into order. For a government to do that is suicide. In order to correct an economic downturn, governments have to engage in counter-cyclical spending. What that means is that, when consumers aren't spending (because they have no cash), it is up to the government to spend, thus putting cash in people's pockets. They then spend that money, creating demand and, in theory, the whole system starts moving again. This is one of the principle premises of Keynesian economic theory. Now, I'm not an economist. My expertise on Keynesian economics comes from reading a few books but the important part is, Keynesian economics works. Getting out of debt by spending more is counter-productive for a family but for a country, it's a sound strategy (assuming the money is spent in the right areas anyway, you can't just cut everyone a cheque like W did). The money has to be spent on something which will put people to work ASAP, preferably working class people so they go out and spend the cash. This is the basic principle of stimulus spending.

Thirdly, nations cannot go bankrupt. Not in the same way as a family can. They can default on their debts or devalue their currency and those can be calamities in themselves but they cannot literally go bankrupt.

Fourth, a great deal of the money owed by governments (most governments) is money owed to itself. A family cannot move money between one pot and another to balance the books, not for long anyway. But a government can and does. Something like two-thirds of the American national debt is actually money the government owes to various parts of itself. Now, does that money have to be repaid eventually? Yes. But unlike your family, the government as both the debtor and lender, can set the terms and timescale of the repayment.

Five, governments can print their own cash. And, in the short term, they can do so relatively free of consequences.

So there's five major differences off the top of my head and, as I said, the second is so major that it really disproves the comparison in itself.

BTW, I'm British. And I wouldn't mind seeing someone take an axe to military spending either.That isn't stimulative spending.