Why comparing government and household spending doesn’t quite work
Why comparing government and household spending doesn’t quite work
The nonpartisan Congressional Budget Office released a report Wednesday projecting a federal budget deficit of $1.4 trillion for 2023. The agency also said the Treasury Department will exhaust its “extraordinary measures” to pay the government’s bills sometime between July and September of this year if Congress does not raise the debt ceiling.
Last month, House Speaker Kevin McCarthy discussed the debt limit and government spending on Fox News.
“What I really think we should do is treat this like we would treat our own household,” the California Republican said. “If you had a child, you gave him a credit card, and they kept hitting the limit, you wouldn’t just keep increasing it.”
We called up some economists to discuss this comparison of household and government finances.
“We are comparing apple and orange here,” said Golnaz Motie, assistant professor of economics at Western Kentucky University.
When it comes to the federal budget, Motie said looking for places to cut is a different process from doing the same for a household, which can often delay making some purchases.
“The government has a lot of obligations that cannot wait,” Motie said. “For example, a handbag can wait. But a payment of an employee of the federal government cannot wait.”
More than 4 million Americans work for the U.S. government, both domestically and abroad. In addition to employing these people, the government is responsible for ensuring national security, building and maintaining infrastructure and providing entitlements like Social Security — all are types of spending that households don’t have to think about.
Another reason the national debt doesn’t work like credit card debt has to do with the government’s immense financial power compared to that of any individual household.
“Even the greatest person with the greatest credit score is just one step away from destroying that credit score by losing their job or missing one payment,” Motie said. “That’s not the case for the government. Households and governments and the tools that are available to them are not the same.”
One tool the government has? Taxes.
“As we all know, it’s not so easy to walk away from your taxes,” said Deborah Lucas, the Sloan distinguished professor of finance at the Massachusetts Institute of Technology. “The IRS has strong enforcement mechanisms.”
The United States brought in revenue of $4.9 trillion in fiscal year 2022, the majority of which came from taxes. The government, of course, sets the rates of these taxes.
“Governments have the potential to control the money coming in more” than households, Lucas said.
A second tool the government has, that households don’t, is the bond market. While households usually have to secure loans from banks, the government can raise money by selling bonds. Buyers include individuals, foreign governments and the Federal Reserve. The U.S. has never defaulted on its bonds, which has helped to keep demand strong.
“Government debt is perceived as being quite safe,” Lucas said. “So it carries a lower interest rate.”
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