Watch in amazement as John McCain promises to make the government “live on a budget, just like you do”:
The first thing to say about this is that it would be silly for the government to behave “just like you do” when the government doesn’t otherwise resemble you in any respect. Sound budgeting practices for a 27 year-old blogger are very different from sound budgeting practices for a 72 year-old multimillionaire Senator. That’s common sense. But suppose we were comparing me not to a 72 year-old multimillionaire Senator, but to a 232 year-old immortal abstract concept that’s able to print money and legally coerce people into giving it money? Well, that would be a very different situation, indeed. Or so you might think.
Another way of thinking about what’s wrong with this idea is that how much money it’s prudent to borrow has something to do with the terms on which you can borrow it. Credit card debt comes at an extremely high interest rate, so the prudent person should avoid amassing any unless there’s absolutely no alternative. But at the moment the federal government can borrow money on very favorable terms, so it’s worth doing so if there’s anything useful on which to spend the money.
But last, connect the “spending freeze” part of this to the “just like you” part. “You” need to cut back on spending because of the bad times. That means other people will get their hands on less of your money. And then McCain wants the government to also cut back on spending. Meanwhile, state and local government has to cut back on spending. But if consumers cut spending at the same time businesses are reducing investment and state and local government are cutting spending and then the federal government also reduces spending well, then, everyone is going to be spending less and less. Which means everyone is going to be earning less and less. And things are just going to get worse and worse. Oftentimes it’s possible to break this cycle without large-scale deficit spending because the Fed can lower interest rates, which makes it easier to borrow and spurs new investments. But the nature of the current crisis is that this won’t work. If the federal government cuts back on spending then we’re going to go down the drain.