In a previous article I promised to report on the functions of the federal budget of the United States. This in order to emphasize that federal government budgeting is simply not an extension of how and why a typical household should use a budget.
Here are three functions of the federal budget.
1. To account for government revenues from taxes and fees and for government spending on goods and services.
This is the most basic function of the federal budget. We as a nation decide, through our democratic form of government, what it is we want government to provide in the form of public goods and services. We also decide how much to raise in taxes and fees and what kind of taxes and fees to impose on ourselves.
Some of the things we decide we want government to do should be considered investments that bring a string of future returns. These would include the building of roads and bridges and rail and harbors and mass transit and flood control and electric grids. Spending on programs that increase education and training and the health of the population might also be considered investment spending, as might some programs that clean up and improve our inner cities and our water ways and that support research and development, including on our military programs that can lead to a more effective defense of the nation.
It is entirely rational that government investment spending be paid for over time rather than on a pay as you go basis. It makes sense for the government to issue bonds, i.e., borrow for this kind of spending.
2. To make for a more equal distribution of income
The total income of the nation, measured imperfectly by our Gross Domestic Product, in a democratic capitalist system is largely dependent on market forces. These forces largely determine how that income is distributed among the population, and they often lead to a distribution that concentrates much of that income among a small fraction of the population at the top tier. This outcome can be seen as unfair, and in extreme cases it can lead to social unrest and worse. Some economists contend that it can cause a less vital and slower growing economy, due to the effect it may have on the holding down the growth in total demand for goods and services in the private sector of the economy.
So one function of the federal budget can be to ameliorate the extent of inequality of incomes. It can do this through the tax system, through programs that subsidize education and training for those with lower incomes and programs that offer direct aid, such as Food Stamps and Medicaid. Social Security is a kind of hybrid, being partly a government provided retirement system and partly a device to modestly redistribute some income from higher to lower income segments of the population. Medicare may be similar in that it is partly a public investment in health care and partly a redistribution of income towards lower incomes segments of society.
This redistribution function of the federal budgeting need not call for borrowing or deficit spending. It can and probably should be done largely on a pay as you go basis.
3. To smooth out fluctuation in aggregate economic activity
Market economies are prone to fluctuations in economic activity. Most of these fluctuations are relatively minor dips leading to some unemployment or in the opposite case when a heating of the economy leads to an uncomfortable rise in prices. These are usually best left alone to be corrected by market forces. But when economic fluctuations lead to a situation where GDP actually shrinks leading to economic recession and unemployment rises to clearly unacceptable levels, government spending on goods and services, which typically accounts for almost 20 percent of GDP, (in the fourth calendar quarter of 2012 it was 18 percent) can be increased to make up for decreased spending in the distressed private sector of the economy. This can help get the economy back to full employment well before market forces would ever get us there.
If we were to get into the opposite problem of an excessively overheated economy leading to too fast a rise in prices, the usual remedy is a tightening up of liquidity by the Federal Reserve, but a cut back on government spending can play a role. For example, that would not be the time for a road building splurge.
Alternatives to an increase in direct spending by the federal government in a recession would be to increase government transfer spending, for example on unemployment benefits, or somewhat less effectively, to decrease taxes. The latter may be less effective because some of the tax decrease may go into savings rather than spending. This can be minimized if the tax decrease is concentrated among those at lower with lower incomes.
But whatever stimulus measure the government takes, running a federal budget deficit in a time of recession makes economic sense.
Click here for some facts on U.S. debt.