The federal government is not like a family, business, or local government


This kind of assertion (from here) is annoying to say the least: “Every business, every family and every person in America eventually has to balance a budget. I’m a small business owner—I have owned and operated my business for 41 years, and I balance my budget every day. The government should be no different.”

But the government IS different in many fundamental ways. For just a few, only the government can print money, wage war, issue passports or drivers licenses, legally kill certain human beings, carry out eminent domain, and certify medical devices or aircraft as being safe for use in commercial practice. Our national government and its budget and assets are orders of magnitude larger than any commercial entity anywhere on the planet. The largest employer in the world, government or commercial, is the US Department of Defense at 3.2 million employees (2012, source). That’s still two orders of magnitude smaller than the US population. Walmart is the largest commercial employer in the world at 2.2 million (2013, same source), thus smaller yet.

No one I know balances his/her budget every day, as this author implies they should, in the sense that expenditures on a day can never exceed net income on that day. No company I know of does that. Many people, self included, mostly try to balance annually or not deviate too far from that. Most public companies manage their finances to show an annual profit so as not to jeopardize their stock prices. But startups operate at a loss for years, and most of them fail completely. Nearly all small businesses come and go in the space of a few years or a couple decades; they usually begin in debt and often end in debt.

In sum, the relentless chant of “must balance the US national budget” is a chimp-chant in my opinion, the crudest kind of cartoon reasoning, applied only to drive change in the balance of political power. I believe that businessmen who join the chant are either disingenuous or incompetent – and I believe one would find that, on average, the chanters’ IQs and educational attainments are about the same as the whole population’s.

So I’d like to see a representative recent annual report of the US government as if it were a corporation:

— Assets including outstanding loans to other countries.

— Liabilities including land, buildings, equipment, debts owed to other countries, bonds (which are government stocks that only pay dividends), and so forth;

— The year’s income versus expenditures.

I bet our nation would come out looking like a financially healthy corporation or family having enormous assets, enormous but proportionate liabilities, and irregular profit/loss numbers year-to-year. Or maybe not, and if so then THAT is the real issue, not balancing the annual budget.

Would you as the two-heads staff economist be interested in doing such an analysis? Or finding a good one?



This is an important topic. The author, Rep. Roger Williams of Texas, expresses a common belief. It is held by all Republicans and, unfortunately, by many Democrats. Nearly everything he says about the federal government’s budget and much of what he says about family and business budgets is false.

I’ll just consider three items for the moment.

First, businesses do not have to balance their budget every day. Indeed, they rarely do. Businesses have several sources for the funds that they need to operate. They can set aside funds from their earnings. They can sell part of themselves, that is, issue new stock. They can borrow money, that is, issue bonds. There are pros and cons to each of these methods, such as tax differences, dilution of equity, and so on. Businesses around the world borrow money in immense quantities, and the market for commercial bonds of all kinds is very large. Whenever a business borrows money, it is running an unbalanced budget. Mr. Williams may have started his business using his savings, but if he started it from his dining room table using his credit cards to finance it, he was running an unbalanced budget.

Second, what is it that is “balanced” about a balanced budget? Actually, in accounting terms a business’s balance sheet is always balanced in that income equals expenditure. In political language, however, a “balanced” budget means that tax receipts equal expenditures. A business gets to count funds from a loan, but the government doesn’t. But why not?

Finally, Rep. Williams notes that Uncle Sam can “print” money, which he asserts is a problem, but is actually a feature. For one thing, while it is true that Uncle Sam prints some of the money we use, most money is not printed. It is electronic and exists in various computer files and is transferred electronically. His list of the bad things that will result from not running a balanced budget is wrong. He says: “It’s the only way to guarantee that the public debt will not outgrow the economy, which would crowd out private investment, raise interest rates and increase inflation.” We can ensure that the public debt does not outgrow the economy by growing the economy. Cutting spending to balance the budget will shrink the economy, making the problem he sees worse. Uncle Sam’s borrowing does not crowd out private investment, does not raise interest rates, and does not increase inflation. You don’t have to take my word for it. Since the economic crash of 2007 and 8, our budget deficit have been large, and the Fed has tripled the money supply, yet there is no evidence that businesses cannot find lenders for worthy projects, and interest rates and inflation have been low.

As for putting together a balance sheet and income statement for Uncle Sam would be a big task.

Also, in your comment you ask: “Of the alleged 16 trillion in the hole, 11 trillion consists of ‘Federal debt securities held by the public’. We the public are the owners. Are we in debt to ourselves?”

The answer is yes. When you loan money to Uncle Sam, he gives you a bond. That bond is an asset. Americans and American businesses hold most of Uncle Sam’s bonds, but not all of them. Many foreign governments and financial institutions hold them too because Uncle Sam’s bonds are the world’s safest investments. We know this because investors accept low interest rates, even zero.

Far from stealing from our children and grandchildren by borrowing money, we are creating assets to give to them. Indeed, while Uncle Sam repays any particular bond holder, when the bond matures, there is no reason why Uncle Sam should ever repay all of his outstanding debt.

Uncle Sam is the monopoly issuer of US dollars. If someone else issues their own US dollars, he sends the Secret Service and the FBI after them and charges them with counterfeiting. Uncle Sam does not have a supply of dollars in the basement of the Treasury Department to which he adds tax receipts and borrowing and from which he spends for jet planes and Civil Service salaries. Uncle Sam creates the dollars he spends when he needs them.

In this way, Uncle Sam is different than every other user of the US dollar. Of course, the ways in which Uncle Sam differs from a family are correct too. But it is the fact that Uncle Sam issues his currency and demands that we pay our taxes with his dollars that distinguishes him and his budget from every one else.


I asked a knowledgeable person to read the above. He added the following (very slightly edited):

An important point is missed in the debate. Yes, governments must maintain an eye on debt ratios and coverage levels, including percent of GDP and revenues/interest obligations. The US is different in one game-changing way: we have the world’s reserve currency. Consider this: The Fed owns, purchased through QE, $3+ trillion of government debt on which the government pays interest which the Fed rebates back. At any time, the Fed could write off, or give back at no compensation, or sell to the government for $1.00, the entire amount, leaving the US with $3 trillion less debt than we currently carry. And the economic consequences? None, absolutely none. So, it is important that the unique rules our government plays by make its situation unique.


Wayne and anonymous informed commenter,
We may consider that Uncle Sam has two pockets: the Treasury is his left pocket and the Federal Reserve Bank is his right pocket. By law the Treasury, which is the arm of the government that pays for the government’s activities, must balance its income from taxes and borrowing with its outflow. When an investor hands over money to the Treasury, and Uncle Sam puts it into his left pocket, the Treasury gives the investor a bond. If that investor keeps the bond to maturity, the Treasury will pay her back in full. In the course of its operations, the Fed may purchase that particular bond. (It doesn’t buy it from her, but from a few Wall Street bond dealers, but let’s leave out some of the details.) The Fed buys the bond from her by giving her money back to her. Of course, not the same exact dollars she gave to the Treasury, but new dollars that the Fed creates for the purpose (but not by “printing money”.) The Fed does not get those dollars from the Treasury or anywhere else. It creates them.
Uncle Sam has paid the investor, and she does not have to be paid again. Thus that bond ought not to count in the “Government Debt Held by the Public.” Strangely, the Fed keeps this bond on its books. The Treasury pays interest on that bond to the Fed, and if the Fed holds the bond to maturity, the Treasury will pay the Fed for the bond in full. The Fed records these payments from the Treasury on its books as profits. The technical term for money a government earns by issuing currency is seigniorage. At the end of each year, the Fed returns its profits to the Treasury, which counts them as income.
Why does Uncle Sam engage in this transfer of money from the Treasury to the Fed and then back to the Treasury? Why doesn’t the Fed stamp “Paid In Full” in big red letters on bonds it buys and truck them from the New York Fed, where it does its buying and selling, to the Treasury Department in Washington, DC, for shredding? I’ve asked this question to several blogging economics professors, who shrug their cyberspace shoulders and say “Good questions.”
I think that the answer is that this is done for historical reasons reflecting habits of thought that arose during the 19th and first half of the 20th century during gold standard days. Variously defined, the United States has been off the gold standard since the 1930s or the 1970s, and no nation today bases its currency on gold. As you can see, the net effect of the processes above are that Uncle Sam, considering both of his pockets in unified accounting, has transferred new money from the government sector to the private sector. Uncle Sam does not have to get the moeny he spends by taxing or borrowing. But by law, based on historical habits of thought, the Fed is prohibited from simply giving new money to the Treasury.
My ideas on this matter arise from Modern Monetary Theory, as its proponents call it. I’m only an amateur, but I believe that this theory is correct. It seems to be a matter for discussion and research within the economics profession.

1 Comment

Filed under Economics

One response to “The federal government is not like a family, business, or local government

  1. Here’s one attempt at a balance sheet: Of the alleged 16 trillion in the hole, 11 trillion consists of “Federal debt securities held by the public”. We the public are the owners. Are we in debt to ourselves?


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