Suppose that year after year, you spend more than you earn. You are worried that you've become fiscally irresponsible. Which of the following could be paths back to fiscal sanity for your household?
A) Spend less.
B) Earn more.
C) Stop at the ATM more often so you'll have more cash in your pocket.
Do we all understand why C is a really bad answer? Good. Now let's try another one.
Suppose that year after year, your government spends more than it collects in taxes. You are worried that it's become fiscally irresponsible. Which of the following could be a path back to fiscal sanity for your government?
A) Spend less.
B) Collect more tax revenue.
Spending less—at least spending less on things you don't need—can be a first step toward sanity for a government just as it can for a household. So A is a pretty good answer. What about B?
As the deadline looms for the congressional super committee, there's seems to be a growing sense that tax revenue for the government is like income for the household. That's wrong. Raising taxes is nothing at all like earning income. Instead, it's a lot more like visiting the ATM.
The government's debt is the American people's debt. If we pay down that debt through higher taxes, we will, for the most part, pay those taxes by drawing down our savings. That's no more "responsible'' than drawing down those savings to finance overconsumption within the household.
The notion persists that an extra trillion in federal spending can be converted from "irr esponsible'' to "responsible'' as long as it's accompanied by an extra trillion in tax hikes. That's like saying a $500 haircut can be converted from "irresponsible'' to "responsible'' as long as you withdraw the $500 from your bank account. If the super committee loses sight of this fundamental truth, it is doomed to fail.