Common Sense is Nonsense:
Republican politicians know as much about Economics as medieval peasants knew about germs. Unfortunately many Democratic politicians are just as ignorant.
Politicians, especially Republicans, in their stump speeches love to compare government finances with household and business finances. They appeal to the common sense of their audience who generally nod their heads in agreement. The politician says: "When a household/business sees that its expenses are more than its income, it must decide how much to reduce its expenses. Government is no different. We must learn to live within our means."
This is not valid thinking. In logic it is known as "the fallacy of composition". This is the false conclusion that because two things are similar in part, they are completely similar. For example: a motor boat and an automobile both have engines therefore they are functionally the same thing. This is obviously wrong.
The finances of a government, especially at the national level are totally different from the finances of a household or a private business. To quote the brilliant economics and political writer Matt Taibbi on this idiocy, "The only thing the budget of the US government is similar to is the budget of the US government."
There are many reasons why government finances are different from those of the private sector. Here are some of them:
1) Starting at the national level, the Federal Government can pay its bills by printing money. Households and businesses can't do this. Technically it doesn't actually print the money, it creates it out of thin air.
2) Both the Federal government and states that have large economies and good credit ratings, like Minnesota, can borrow virtually unlimited amounts of money at the lowest possible interest rates. Households and businesses don't have unlimited credit lines and they must pay higher interest rates than governments.
When Minnesota sold five year bonds to get immediate cash from its share of the National Tobacco Settlement, (a completely irresponsible and very costly move- another example of Republican bad and deceptive fiscal management) it paid an interest rate less than the rate of inflation. In effect, investors were paying Minnesota a fee to hold their money for five years. (The real interest rate is the nominal rate less the rate of inflation)
3) Governments have legal income producing powers that households and businesses do not have. They can raise taxes or impose new taxes. They can confiscate property and put people in jail for not paying their taxes.
4) Governments are not profit seeking businesses. They exist to provide services to the general public. The standard they must meet is whether they satisfy voters, not how profitable their operation is.
5) Governments often must think very long term when making spending decisions. Infrastructure projects take years to plan and are expected to last for 50 or more years. The Brooklyn Bridge, still in use, was completed in 1883.
6) Governments spend money to benefit some people that was collected from people who receive no benefit from that money. That people who have no children are required to pay taxes to support public schools is an obvious example.
Republican politicians know as much about Economics as medieval peasants knew about germs. Unfortunately many Democratic politicians are just as ignorant.
Politicians, especially Republicans, in their stump speeches love to compare government finances with household and business finances. They appeal to the common sense of their audience who generally nod their heads in agreement. The politician says: "When a household/business sees that its expenses are more than its income, it must decide how much to reduce its expenses. Government is no different. We must learn to live within our means."
This is not valid thinking. In logic it is known as "the fallacy of composition". This is the false conclusion that because two things are similar in part, they are completely similar. For example: a motor boat and an automobile both have engines therefore they are functionally the same thing. This is obviously wrong.
The finances of a government, especially at the national level are totally different from the finances of a household or a private business. To quote the brilliant economics and political writer Matt Taibbi on this idiocy, "The only thing the budget of the US government is similar to is the budget of the US government."
There are many reasons why government finances are different from those of the private sector. Here are some of them:
1) Starting at the national level, the Federal Government can pay its bills by printing money. Households and businesses can't do this. Technically it doesn't actually print the money, it creates it out of thin air.
2) Both the Federal government and states that have large economies and good credit ratings, like Minnesota, can borrow virtually unlimited amounts of money at the lowest possible interest rates. Households and businesses don't have unlimited credit lines and they must pay higher interest rates than governments.
When Minnesota sold five year bonds to get immediate cash from its share of the National Tobacco Settlement, (a completely irresponsible and very costly move- another example of Republican bad and deceptive fiscal management) it paid an interest rate less than the rate of inflation. In effect, investors were paying Minnesota a fee to hold their money for five years. (The real interest rate is the nominal rate less the rate of inflation)
3) Governments have legal income producing powers that households and businesses do not have. They can raise taxes or impose new taxes. They can confiscate property and put people in jail for not paying their taxes.
4) Governments are not profit seeking businesses. They exist to provide services to the general public. The standard they must meet is whether they satisfy voters, not how profitable their operation is.
5) Governments often must think very long term when making spending decisions. Infrastructure projects take years to plan and are expected to last for 50 or more years. The Brooklyn Bridge, still in use, was completed in 1883.
6) Governments spend money to benefit some people that was collected from people who receive no benefit from that money. That people who have no children are required to pay taxes to support public schools is an obvious example.
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