Understanding Government Budgets: Beyond Surplus Myths

Are government budgets aiming for a surplus truly ideal? Often, political rhetoric portrays a surplus as the best outcome for fiscal health. Phrases such as 'back in the black' might be used to make this more appealing. However, this is a misconception. Politicians often ignore economic truths that counterintuitively suggest that a surplus is bad news, while a deficit can be a positive indicator. This article delves into the complexities of government budgets and the economics behind them.

Economics Beyond Politics: The Nature of Surpluses and Deficits

When one looks at a government budget, the comparison between tax revenues and spending is crucial. The common belief is that spending should be financed by higher tax revenues, leading to a surplus. Yet, the reality is more complex and nuanced.

Monetary sovereign federal governments do not operate on this principle. A surplus means that there is more tax revenue than needed to cover spending in a given fiscal year. However, you cannot save or spend this surplus within the economy. A budget surplus is merely a hole in the account requiring a fix.

The Balance Equation: How Budgets Add to Zero

Each year, all budgets should balance out to zero. When one sector has a surplus, another sector necessarily has a deficit. This principle applies even to individual accounts. For instance, your deposit in a bank is a debt to the bank because it is obligated to pay you. Similarly, the Federal Reserve’s deficit is matched dollar for dollar by the non-government surplus.

The Birth of Long-Term Fiscal Irresponsibility: The Role of Congress

This reality is not just a theoretical concept. For decades, the U.S. Congress has set budgetary limits that are not adhered to in practice. A key example is President Lyndon B. Johnson, who famously advocated for "guns and butter." Meaning, the government could support both a welfare state and maintain a massive defense budget during peacetime.

Johnson did not campaign on the idea of a permanent military build-up, but his presidency saw significant growth in entitlement spending (Medicare and Medicaid) as well as expensive expansion in America’s space program. This marked a departure from previous norms of responsible spending.

The Persistence of Irresponsible Fiscal Policy

From the 1960s onward, efforts to restrain budgets have been largely political window dressing or outright deception. National emergencies such as the Great Depression and World War II were the rare instances where budgetary norms held true. However, in times of peace, the drive for economic growth and social programs has often overridden these guidelines.

Conclusion

Understanding the nature of government budgets is crucial beyond mere political rhetoric. A surplus is not a measure of fiscal health but rather a balanced system where the rest of the economy can thrive through responsible deficit spending. By embracing this concept, governments can make more informed decisions that serve the greater economic good.