Here’s What Conservatives Have Wrong About “Big” Government

It should be no surprise to anyone but we know that conservatives do not like “big” government. However, how do you define big? Some would define it as government having a major role in the economy –and that is a totally fine definition. However, many define the government through its deficit/debt. Many believe a government that is in deficit is a big government, and a government that runs a balanced budget/surplus is a small one. This belief here is totally flawed, because it looks at only one side of the equation.

Here is a chart of the financial balance of the private sector (Household+ Business) as a percent of GDP.

Chart via Biz Insider

 

Now here is a line chart of the same thing, except that the Government and Current Account Financial Balance are included. Notice anything similar/mirror-like?

Chart via PragCap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

And in case you don’t see the relationship yet, here is the same thing, except in bar form. This chart clearly shows how the Government deficit must equal the Private sector surplus (1st chart) + the Current Account Balance.

Chart via @naufalsanaullah

 

 

 

Now, what does this have to do with the government being “big” or not? Well, if the government is running a surplus (or is running a shrinking deficit), it is confiscating financial assets from the private sector, which technically makes it “richer”. Think about it. If the private sector has a financial balance of +$100, and the government runs a surplus of $5 (ignoring the current account here), then the private sector now only has $95. The private sector got smaller because the government sector got bigger (“richer”).

If you’re a conservative, you should hate that, as John Carney explains:

 If it bothers you that the government spends tax money on bridges to nowhere, you should apoplectic when the government takes tax money and spends it on nothing at all. That, of course, is exactly what happens when our federal government taxes more than it spends. The financial assets of the people are simply confiscated.

Now, running a deficit does not always mean government spending has to increase. There are three ways to increase the government deficit. Increase spending, Decrease Taxes, or both. Personally, I favor the third option (Increasing certain spending or cutting certain taxes—but I’ll hold this debate for another day).

When conservatives like Grover Norquist promise to fight against  letting the government have more of your money in order to reduce the size of government, they are  right! If taxes are reduced, it *shrinks* the government. But not because they have less funds to spend. “Starving the beast” will not make the government because it will force less spending.

I’ll let John Carney explain (again) why the “starve the best” theory is flawed:

Falling revenues are typically accompanied by rising spending; while rising revenues are accompanied by falling spending. In other words, the “beast” of government spending doesn’t require a meal of taxes to grow. It thrives, in fact, on a starvation diet. Government is a hunger artist.*

Now we know what the problem is: Big government is associated with deficits when in fact it should be associated with surpluses and balanced budgets! If conservatives want to shrink government influence of the economy, they then need to be advocating for deficits shaped with heavy tax cuts along with their reduced spending stance. Why deficits (this assumes current account balance is negative)? Because surpluses mean the government is taxing more than it is sending back out to the private sector.

 

Tags: $MACRO

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