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Fiscal crisis ahead is self inflicted [Commentary]

Drawing parallels between government spending policy and household finances has its perils. There's an extraordinary difference in scale, for one thing.

And there's the matter that people will often argue against government debt on the grounds that debt amounting to three or four times household income is financially crippling, even though just about everyone who owns a house and a car is carrying at least that much debt.

A few realities of debt and finance, however, apply to every situation involving money. It is vital that, over the long haul, total expenses are less than the amount of money coming in. It also is vital that necessities are bought and paid for, so there are situations when running short-term heavy debt that can be paid off in the long run is a reasonable idea.

There's a school of thought in government these days that says debt is a bad thing and, even if it hurts in the short run, cutting government spending is vital and will make the country better in the long run.

This isn't a new idea. John Maynard Keynes, whose economic observations of the financial situations of World War I era Europe formed the foundations of modern macro-economic theory and practice, observed that while balanced books are good in the long run, there's a problem: "In the long run, we're all dead."

Keynes advised against demanding massive war reparations from Germany, having calculated that it would cost the defeated nation generations of austerity to pay back what was being demanded. His advice was ignored. It has been argued that the resulting upheaval in Germany in the 1930s was the result.

Regardless of whether government imposed austerity helped spark World War II, the Allied powers didn't make the same mistake after the second victory. The vanquished nations were re-built, at substantial cost, but the long run has shown that taking care of the needs of the people in the short run has benefits that pay off for generations.

These days, this nation is facing substantial debt, as well as austere times, brought about by a variety of factors. There's something of a sentiment that the bills be paid now so things will be better in the long run. Locally, the result is likely to be pay cuts or even furloughs of federal employees of the Department of Defense. It remains to be seen what the effect on the local economy will be, but it won't be positive.

Though Keynes' observations became the basis for a structured way of looking at large economies, over the past 40 years, his suggestions of what should be done to manage economies for the public good are generally sublimated by a school of thought that says low taxes, minimal government and low public debt are the solutions to all economic problems. Curiously, such theories bear a striking resemblance to those that pre-date Keynesian thought.

What does it all mean?

Well, if a family's income is suddenly cut by a substantial amount, it doesn't make sense to start taking out loans willy-nilly to cover the difference. It might, however, make perfect sense to take out a loan to facilitate financial restructuring and make some short term cuts a little less painful.

Then it becomes that much easier to find a way to replace the lost income and pay back the full amount when times are better.

The financial situation this nation finds itself in is largely self-inflicted, but that also means the people in the best situation for getting us out of our difficulties in the short run are us. And there's no point in waiting to see what the long run brings. Mr. Keynes already explained that.

Unfortunately, it may well take a bit of financial pain in the short run before that reality is brought into sharp focus.

Copyright © 2014, The Baltimore Sun
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