WV Center on Budget and Policy > Blog > Uncategorized > The Apples & Oranges of Public And Personal Finance: Putting Deficit Spending Into Perspective

The Apples & Oranges of Public And Personal Finance: Putting Deficit Spending Into Perspective

Howard Swint’s recent commentary in the Charleston Gazette rails against government spending in the wake of the greatest recession since the Great Depression. There’s really no shortage of targets for Swint’s ire: the Emergency Economic Stabilization Act of 2008 that created the Troubled Assets Relief Program (TARP), Bush’s infamous tax cuts, supposedly mismanaged pension plans.

To some extent, it’s easy to see how deficit spending during a recession could seem counter-intuitive. After all, as private individuals, we’ve all been tightening our pursestrings over the last few years — most of us, not by choice. Accordingly, demonizing government spending has been a very effective tool in channeling populist rage.
And yet, this frustration signals a widespread, fundamental misunderstanding about the distinctions between public and personal finance. Comparing the two, particularly in the midst of a deep recession, is a classic case of apples and oranges.
The sudden increase in public debt is a direct response to a recession that was driven by the rapid decrease in private debt following the bursting of the housing bubble. Basically, the decline in private debt means that consumers and businesses are trimming their budgets, putting less of their money into the economy. 
It doesn’t help that tax revenues are down, as well. Double-digit employment and fiscally unsound, plutocratic tax policy will do that to a government. This is the one nail Swint hits on the head.
However, he’s misguided in attacking TARP, which although it may not have been the best option, certainly stopped the bleeding, preventing the country from despairing into a deeper, perhaps irreconcilable depression. TARP prevented the loss of 8.5 million more jobs and an additional 11.5 percent in GDP.
And then there’s Swint’s failure to distinguish between the national and public debts. The two are not synonymous, so when his argument against all things government mentions that the national debt is now 90 percent of the GDP, he appears to conflate the two. In reality, public debt constitutes only a portion of the national:
It helps to look at history, too. In the process of successfully guiding the country through two of its most trying challenges — the Great Depression and World War II — the Roosevelt Administration reached a public debt of 108.7 percent of GDP, the highest level ever recorded. In 1956, a decade later, economic growth, reduced defense spending, and the rise of a vibrant middle class had reduced the measure by 56 percentage points. The economy didn’t pay down the debt, it grew out of it.
According to Swint, we should mind “the free market benefits of . . . economic sacrifice such as [that] realized from [the] restructuring of failed firms.” The thing is, governments and countries and economies are not private firms. They have different interests in mind and different tools at their disposal. 
Moreover, lauding the “free market” seems odd, considering its irresponsibility and predatory practices precipitated the bursting of the housing bubble, necessitating massive government intervention in the first place. 
The moral of the story is to calm down about deficit spending and view it not as a sign of the apocalypse, but as a tool to use in times of economic turbulence. If Keynesian economics can defeat the Great Depression, it can handle our current woes. When there is no demand (debt) in the private sector, the public sector must spend to create it. That’s Public Finance 101.

5 Responses to “The Apples & Oranges of Public And Personal Finance: Putting Deficit Spending Into Perspective”

  1. Renate Pore Renate Pore says:

    OK. Now I get it. Very goodcommentary.

  2. Howard Swint says:

    So the answer is more deficit spending and public debt (that you’ve not differentiated but rather wrongly access me of not presenting to your satisfaction) as opposed to living within your means?
    What of future generations whose money you’re spending even before they’ve earned it? Won’t they have economic recessions and unemployment, too?
    And also throw out market forces in favor of bailout all failing banks and pension programs?
    Your policy suggests that there is no moral hazard so long as the taxpayers can bailout anyone who takes excessive risk and fails – right?
    Look, you guys are dead wrong when you profess that more government spending is the solution.
    Public sector spending to create demand in the private sector is failed Public Finance 101 if we have to one day reconcile the books.
    Your way suggests that we could just tax and spend and borrow and spend our nation out of any economic downturn.
    We can’t.
    Better stick with your policy decisions more akin to trying to get more teacher raises by having the state not honor the OPEB debt and leave Paul Krugman to speak for himself.

  3. Howard Swint says:

    “…his argument against all things government…”
    What a hack job – you get funding for this?

    Also, the national debt is 89% of GDP.

  4. Ted Boettner Ted says:


    Thanks for yourcomments. I think a lot people hold the same opinion as you do, but there’s also large body work (Krugman, Arrow, Solow) and a diverse group of people that see things very different. Mark Zandi, chief economist for Moody’s Economy and former McCain adviser, holds that we need to deficit spend to increase revenue in the future.

    Here’s a few others:

    David Walker, President and CEO of the Peter G. Peterson Foundation: “I think it’s very important to separate
    the short term from the structural. It’s understandable to run deficits when you have a recession, a depression or unprecedented financial services and housing-type of challenges and crises that we’ve had. That’s not what I’m
    concerned about.”

    Gene Steuerle, Senior Fellow, The Urban Institute, and co-director of the Urban-Brookings Tax Policy Center: “Contrary to much debate, getting the long-term budget in order does not require avoiding stimulus in bad times; it only means reasonable reductions in those levels in good times.”

    Greg Mankiw, Harvard Professor and Former Chairman of the Council of Economic Advisors under George W. Bush: “It is a textbook principle of prudent fiscal policy that deficits are an appropriate response in times of war
    and recession.”

    Isabell Sawhill, Senior Fellow, Brookings: “It is important to stimulate the economy now and not worry about the deficits needed to do this but we should simultaneously be enacting legislation that will gradually phase in spending
    cuts and revenue increases over the next decade.”

    Austerity at a time when total liquid assets for UScompanies is at a 50 year high ($1.8 trillion) doesn’t appear like a good solution, especially when interest rates are up against the lower zero bound and inflation is near zero. The problem is clearly a demand one, not a supply problem and business are stockpiling cash and refusing to hire workers. Government spending is the only solution.

    As for future generations, the Fed could in principle buy and hold the debt used to finance the deficit so it places no interest burden on future generations.

    Also, just to clarify, OPEB is not a “debt” it is a liability – according to Moody’s Investors. I think the state should ensure that all retired public workers have access to affordable health care. I just don’t think pre-funding it makes much a lot sense. OPEB is actuarially flawed, and even David Bond acknowledges this in the CAFR, only about 1/4 of UScompanies that provide this benefit pre-fund. I think we could get a much better return by investing in early child care and education. The RHBT is not going to pay for any increase in premiums over the next 15 yrs, so why pre-fund? It won’t have much effect on our credit rating. We are chasing our tails (is it $4b or $8b, it all depends on the assumptions) and it I think it’s bad policy. The problem is PayGo. We should be increasing the amount (say $10-20m) each year to cover the costs instead of parking $365 million in a trust

  5. Ted Boettner Ted Boettner says:


    Sorry, I forgot to address your secondcomment. The above entry was making a distinction between “gross debt” and “net debt.” We apologize if that wasn’t clear.

    Here’s a good paper on the difference:

    As the Congressional Budget Office stated in its June 2009 report on the long-term budget outlook, “Long-term projections of federal debt held by the public, measured relative to the size of the economy, provide useful yardsticks for assessing the sustainability of fiscal policies.” In contrast, “gross debt . . . is not useful for assessing how the Treasury’s operations affect the economy.”

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