Obama Posits False Analogy Between “PayGo” Rules and Household Budgets

At yesterday’s fiscal responsibility summit, Barack Obama talked about his desire to re-impose “pay-as-you-go” budget rules, saying:

The pay-go approach is based on a very simple concept: You don’t spend what you don’t have. So if we want to spend, we’ll need to find somewhere else to cut. This is the rule that families across this country follow every single day — and there’s no reason why their government shouldn’t do the same.

This is sort of a political banality, but it’s not very accurate. The way PayGo works is that whenever you want to increase spending on something, you need to identify a precise offsetting increase in revenue or decrease in spending on something else. That’s not at all the way I spend money. If I’m at the local sandwich shop getting lunch, and I see a special sandwich for sale that looks super-yummy but costs a bit more than the sandwich I’d been planning to buy I don’t stop, identify an offsetting future lunch (bring in a sandwich from home instead of buying one…) calculate whether or not it exactly covers the difference, and then place the order. More broadly, Brian Beutler observes:

This is sort of ridiculous. Americans everywhere expend beyond their immediate means all the time. It’s gone too far in the last many years, but there’s nothing wrong, in principle, with buying some stock, taking on a bit of credit debt, having a mortgage on a house, or putting money into a certificate of deposit account. We’d actually have some pretty big problems on our hands if Americans suddenly turned to pay-as-you-go personal budgeting, even though they’re certainly moving into less risky positions as the economy nosedives.

Indeed. Suppose a good college offers to let you study there in exchange for a bunch of money. More money than you have! But then it turns out that you can get a loan to pay your tuition on reasonably attractive terms. It’s not “living beyond your means” in some kind of imprudent way to take the loan. On the contrary, it would be imprudent to let debt-aversion keep you from going to college. The wage premium earned by college graduates far outweighs the debt burden. That’s not to say that PayGo’s a terrible idea. The budget process ought to be different from the way individual households handle their money. But that’s just the point, it gets very misleading to think of the federal government as analogous to an individual. Among other things, people die and the government doesn’t. And the budget process is, obviously, a political process so it makes sense for it to be stilted and formal in a way that household budgeting isn’t.

That said, PayGo is actually a pretty bad model for the component of the federal budget that relates to infrastructure. It would make much more sense to budget for that the way a company budgets for business investment—on a depreciation schedule rather than on an ongoing-cost basis.