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 realized from 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.

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