The Rainy Day

How often do you find Matt Yglesias and Megan McArdle agreeing on something? Yglesias, talking about the need to be conservative with future budget projections, says:

The other thing, of course, is that “stuff happens.” Nobody sitting down in 1925 to write a 25-year budget forecast would have made the funds available to win World War II. It’s nice to think that you have a plan that leaves headroom to engage in some deficit spending if it turns out a meteor is going to strike the earth, or Jack Layton is the leading edge of a Viltrumite invasion.

We don’t even need to go back to World War II. We can go back to 2001, when we had a projected surplus. So we spent and cut taxes. And … suddenly we didn’t have the money for a trillion dollar war. We can look at Japan, which invested zillions in “stimulus” spending, got themselves into massive debt and then got hit by one of the biggest natural disasters in history. Hell, we can look at our current situation, where we were pushed to the maximum sustainable debt and suddenly had an economic collapse. We see it in states that cut back on snowplow budgets in warm years, then scream for help when they get a blizzard.

McArdle makes the comparison to people’s personal finances.

Have you ever known anyone who got into trouble with credit cards? I don’t mean someone who had something go wrong and ended up deep in credit card debt because they had to pay the rent somehow; I mean someone who wakes up one day with $21,000 in debt, a closet full of shoes, and no idea where the money went?

The way they get into that trouble is often that they don’t budget. They consider each purchase in isolation: “can I afford these shoes? Can I make the payments on that television?” And in fact, they can afford each of their purchases. They just can’t afford all of them.

We hear this constantly on the spending side. “What kind of country are we if we can’t afford education?” “Surely, this country can afford to provide healthcare to everyone!” “Farm subsidies are such a small part of the budget!” Yes, we can afford some of these things; the problem is that we’re trying to afford all of them simultaneously.

And we’re setting ourselves up to make the same mistakes again. The liberal plans to sort of balance the budget all have taxes rising to historically high levels. The problem is that you now have no room if something really bad happens. Technically, yes, you’ve “balanced the budget”. But you’ve put yourself into such a tenuous fiscal position that a war, a disaster or an economic downturn is ruinous.

A time of peace and prosperity is not the time to be pushing your taxation level to the “break glass in case of emergencies” level. You have to leave some room for the unexpected.

Comments are closed.

  1. JimK

    Yes, we can afford some of these things; the problem is that we’re trying to afford all of them simultaneously.

    Dude. Is there any way you can forcibly project that particular thought into the skulls of every human in America?

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  2. West Virginia Rebel

    It’s the kind of short-term thinking that unfortunately runs in both sides. The Democrats do more of it, however-and they never seem to have any answers as to where the extra money for a real emergency is supposed to come from after they’re done “fixing” things.

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  3. Seattle Outcast

    Being able to afford something isn’t the same thing as needing it, or even if it’s a wise purchase at all. And as for the things we do buy as a nation, we tend to end up paying premium prices for 2nd rate product (education, I’m looking at you). The concept of “slippery slope” is lost on people, unless their pet right is being infringed upon.

    I’m willing to be that for most of the people that have sat in congress for the past 70 years the thought “fuck it, we shouldn’t be spending one red cent on this” hasn’t occurred to them.

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  4. Hal_10000 *

    Being able to afford something isn’t the same thing as needing it, or even if it’s a wise purchase at all.

    THIS

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  5. CM

    Unfortunately, our western economies are structured to rely on masses of unsustainable personal debt. It’s effectively all a big Ponzi scheme. Growth requires people to keep purchasing additional goods and services. However their real wages stagnate, the only way that can happen is via credit. Inevitably, we then have periods with look like boom times but in reality are just growing household debt mountains. Of course people shouldn’t be doing that, but everything in our commercial environment is telling them that’s exactly what they SHOULD be doing. So bascially we’re busy promoting a system that relies on debt, while at the same time scolding individuals who believed the hype and got themselves into debt (like good little consumers).

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  6. CM

    As above, one of our most well-known (and pro-capitalism) economic commentators has done a ‘mea culpa’ on his belief in modern capitalism.

    He’s realised, like many others (particularly in Europe) that all the ‘growth’ and ‘success’ in modern economies was largely a fraud as it was simply propped up by increasing mountains of unsustainable debt. It was inevitable that it would come crashing down. But the problem is inherent in the design. So the system needs to be redesigned.

    I feel like a priest who has been wrestling with his belief in god and has now decided god does not exist.

    http://www.interest.co.nz/opinion/opinion-why-we-must-abandon-economic-orthodoxy-and-embrace-capital-trade-and-exchange-rate-controls

    Here is the key article that Hickey refers to in his piece….

    http://www.newstatesman.com/ideas/2010/07/debt-system-mother-black

    His about-turn made the news itself.

    His main argument is that he’s changed his mind because the less restricted the market is, the greater than debt problem becomes. The big wake-up call has been that while we thought we’d found a perfect recipe, it was a fraud as it relied on massive unsustainable debt levels and a continual decline in the real wealth of the middle class in developed countries. The system RELIED on people living beyond their means.

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  7. AlexInCT

    The Democrats do more of it, however-and they never seem to have any answers as to where the extra money for a real emergency is supposed to come from after they’re done “fixing” things.

    I disagree. They believe they can do it all with other people’s money. Anyone that has more than they think they are allowed to, should give it up. We should all be equally miserable unless we are part of the elite class. Only they are allowed perks for their “great sacrifices”. It;s not coincidental that when this stuff plays itself out, we always end up with a system like Cuba, the USSR, North Korea, and so on. Even the rich ones eventually devolve into this shit as “Other people’s money” runs out.

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