March 22, 2009

You have your deficits, why shouldn't the government?

If you borrow to buy a house or a business, you're in deficit for a goodly number of years. It's a solid and sensible investment though, right? No one would accuse you of being an irresponsible spendthrift, nor would you accept the label.

However, if you borrow to buy a new Prada handbag once a month and a new Amarni dress once a week, you'll look delightful, I'm sure, but your long term fiduciary well-being (short of catching a wealthy husband blinded by your fashinista self) are not so hot.

Same with government deficits. Money well spent is always going to be a good investment, including when a deficit is required, along with the mega interest bill.

A balanced budget doesn't work for households wanting to improve their long term position any more than it works for countries.

So, lets not fidget and fuss too much over government deficits, unless the deficit is too small to be suitably kick-arse, or spent on the wrong things (here's looking at the Ruddster!).

There's a neat little summary of the situation in the NYTs today - deficit is not a dirty word:

"Over the last eight years, Bush administration deficits raised the national debt by almost $5 trillion. Given the current crisis, it’s easy to imagine a similar increase during the next four years. At recent interest rates, servicing $10 trillion of extra debt costs about $400 billion annually — a big amount, to be sure, but less than 3 percent of the economy’s full-employment output. We’ll still be the richest country on the planet even after paying all that interest."

And paying off the US deficit won't take an eon of generations, nor will it be agonisingly painful. For example:

"Once the downturn ends, there should be no need to incur additional debt. Indeed, there are many ways to pay down debt without requiring painful sacrifices. A $2 tax on each gallon of gasoline, for example, would generate more than $100 billion in additional revenue a year. Europeans, who pay more than $2 a gallon in gasoline taxes, have adapted by choosing more efficient cars — and they appear no less satisfied with them."

Down under, our deficit is much smaller than those of other countries and will not take even a single generation to pay off. Assuming things eventually go in an upswing-like direction ... sometime ... preferably this millennium.

Don't waste time hand-wringing.

The government deficits are small stuff compared to the way we've all been screwed by the financial markets (hey there, here's looking at my super fund!).

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