For those of you who like to run to the dictionary while reading this column, I apologize for the simplicity and directness of the words I am going to use.
Governments get and spend money. There the comparison with households and businesses ends. Governments (federal, state and local) have the power to tax. They can pass laws that require citizens to pay money to the government. You and I and the business down the block cannot require such payments.
Governments spend money, just as we do, and they also give money to people who have certain needs. Thus governments can give money to the poor for housing, food or medical care.
Since governments are elected by the people, it is thought that the actions of the government are approved by the people. Unfortunately, most people no longer believe that Congress or other parts of government act with the approval of the people.
If a government spends less than it gets in revenue (taxes and fees), there is a surplus. If government spends more than revenues, there is a deficit. But the books must be balanced. When there is a deficit, the government can borrow money; it can go into debt. If it borrows year after year, the debt becomes the sum of the yearly deficits.
Government debt is popular with people who have money to invest because they believe the government will pay the interest on the debt and pay back the amount borrowed (the principal) when the debt is due.
How much debt is too much? No one knows. When people stop being willing to invest in the government (buying its notes and bonds), interest rates will rise, and we will have a clear clue how much is too much. That’s what happened in Greece.
Some people get very excited about government deficits because they think government spending is a waste of money. Of course, they make exceptions for snow removal and a few other services. But those exceptions lead to all sorts of problems.
Is it all right for a government to borrow money to buy snowplows that last five years and pay off the debt over time? Can government make productive investments? The answer for some people is no — the government should rent the plows. In fact, they might say, the government should hire businesses to plow the streets and not be in the snow-plowing business itself.
Why? Because government, according to these people, cannot be as efficient as private businesses. This is an argument, not a fact. It is this argument that powers the great debates between liberals and conservatives in our time.
Neither side has conclusive proof to support its claims.
Liberals believe governments outperform the private sector in many areas because the profit motive is not at work and the focus is on the benefits to the public. Conservatives generally believe that the profit motive will benefit the public by driving down costs that tend to grow in public services.
If the public sector is a cesspool of waste, then the public debt is a danger. If, however, the private sector is a sinkhole of greed, private investment would be a danger to the public good. Beware of anyone who thinks either of these statements is completely true.
Morton Marcus is an economist, formerly with the Indiana University Kelley School of Business.