The Private Intellectual
Ecclesiastes-Based Real Estate Advice


Tuesday, February 16, 2010  

Good Borrowing, Continued

A few days back I made an analogy to car repair to argue for the necessity of short-term borrowing. TAE rebuts my example here:

If you are a contractor and need your car, you should have the foresight to know that even the finest Toyota Corolla occasionally has an accelerator pedal failure and needs repair. And so each month you put a small parcel of your gross income into an account which you hold for car repairs...

The government, on the other hand (and this especially is true for state governments) chooses to not save. Should a budget surplus occur, and it has in the recent past, they choose to up the budget to utilize all that extra money. And then when the inevitable car repair comes up, they deficit spend because they have no saving hedged away...

There is no good kind of Federal deficit spending. Suggesting that a little here or there when necessary implies that the Federal Government is simply too inept to see forward at all.

I think in order to make sense of the analogy, you need to honor its constraints. Of course it would be better if you had savings for urgent car repairs. But imagine you're just starting out and you didn't have any parental help buying your car or other equipment, so you've got loan payments for all that (remember that paying off your debt is a form of saving). Or that you burned up your savings on some needed medical expenses late last year. Or that you didn't give too much thought to the future and bought lottery tickets instead. It doesn't really matter why you lack the savings to repair your car--you can't go back in time and un-spend the money. Whatever the reason, it would still be prudent and rational to borrow some money right now, on terms you can afford, in order to avoid a catastrophic loss of income.

The same is true, mutatis mutandis, with the federal budget. God how I wish we could go back in time and persuade the people of Florida to express their presidential preferences more clearly in 2000. No big tax cuts, no Iraq war, and thus a much healthier federal budget, perhaps one even in surplus, before the big economic collapse (which would have happened anyway, most likely). We had budget surpluses, both actual and in forecast, when George W. Bush took office. These were being used to pay down our federal debt--which is what the federal government does with "saved" money--to make any needed future borrowing cheaper and less burdensome. Ideally, that's how government budgeting works--you run a surplus in good times to help keep the economy from overheating and a deficit in downturns to keep aggregate demand from collapsing.

Unfortunately, that's not what happened. And yet we found ourselves in a situation, in late 2008 and down to today, where our revenues are far too small to cover expenses that we more or less agreed we need to run. So the TARP was passed, the ARRA, and a host of other measures meant to stabilize the economy. The result is a short-term deficit that is staggering and bothersome to a lot of people. But most of those people can't make a persuasive case for what else could or should have been done to keep the deficit down in a time of desperately low revenues.

The popularity of Dave Ramsey's financial advice is probably a needed corrective to a society that is deeply over-indebted. But it has its limits. Access to credit is enormously important. Home loans were essentially unavailable to most black Americans for decades, forcing them to pay for homes on installments and risk losing both house and payments if they fell behind even once. The cost this imposed on black communities is devastating and on-going. Most successful people got some help from their parents at some point: making a down payment, paying for college, buying a car, fronting a deposit for an apartment. When you go to college and grad school, whatever your parents and the institution don't cover ends up as a loan--another good form of borrowing. If you had to get a degree on the installment plan, you'd forgo a ton of income. And no matter how prudently you plan your finances, one big emergency can force you to fall back on credit for basic expenses.

And for the federal government, that last point is even more important. What peeves me most about the moralistic case for deficit-hawkery is its implication that "government" can be cut without cost to human welfare. There's definitely waste in the federal budget, but you can't cut very far before you start hurting people--veterans, retirees, children in low-income schools, people who need public assistance for health care, families who need heating assistance, food safety inspections, and so on. No one would starve their own children because Dave Ramsey told them to cut up their credit cards and they didn't have any other money, but plenty of people are at least notionally willing to tolerate a great deal of human misery in the name of balanced budgets.

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posted by Benjamin Dueholm | 10:24 AM
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