(Readers: The assumed chronological date for most of the entries in this blog is after the expected 5^th revolution in the US.  For more background about  the expected revolution – labeled the Revenge Revolution – and the author, please view entry #01.)

Scene: Jordan and Helicopter Man (H-Man) continuing a conversation about economics, with special emphasis about the role of government.

H-Man:  “We’ve got our coffee refill.  Now, back to my question.  ‘Why shouldn’t the government take the same approach to economic policy as we do in our household?’  The approach makes perfect sense to me…and a lot of other people.”

Jordan:  “In certain economic situations, the behavior of households should be exactly the opposite.  Ironically, what seems right intuitively is actually wrong.”

H-Man:  “I am confused.  When should governments and households behave in opposite ways?  Give me a specific example.”

Jordan:  “Let’s say economic times are bad.  Think back to 2008-2009.”

H-Man:  “Lots of unemployment and concerns about more layoffs.  Seems to me very logical for people to tighten their belts and reduce spending.”

Jordan:  “I agree.  Very rational behavior for an individual or family.”

H-Man:  “At least we agree on something.”

Jordan:  “Now, here’s a basic question.  ‘Where does your income come from?’”

Greenie:  “Since I’m not independently wealthy, my employer.”

Jordan:  “And where does your employer’s income come from?”

H-Man:  “Selling stuff.”

Jordan:  “So what if a lot of people quit buying stuff from your employer…and quit buying stuff from many other companies?”

H-Man:  “The companies make less money.  Then there’s probably not enough money to pay the employees…and then more layoffs”

Jordan:  “So what happens if the government cuts back on spending money also?”

H-Man:  “Even fewer purchases, less income for companies…and even more layoffs.  So if the government tightens its belt along with everyone else, the economy gets worse…not better.”

Jordan:  “Remember, what you spend is my source of income.  You cut back on spending and I have less income and then I have to cut back.”

H-Man:  “So the only way to get the economy going again is for someone to start spending money.”

Jordan:  “You are beginning to understand why government needs to increase spending in economic slowdowns and not decrease spending.  The claim that the government should behave as a household actually makes the situation worse, not better.”

H-Man:  “Why not give tax cuts to the people making money instead of having the government spend money.  I just don’t like the idea of government spending money that’s not theirs.”

Jordan:  “Tax cuts might help some but not much.  Here’s why.  If you are out of a job, how much income tax will you be paying?”

H-Man:  “Probably little or none.  So, I see what you’re saying, a tax cut doesn’t really help.”

Jordan:  “What if you are relatively wealthy and get a tax cut.  What will you do with the extra money?”

H-Man:  “Maybe spend a little.  But won’t the wealthy invest it and create more jobs?”

Jordan:  “Invest the money in what?  Additional plant capacity?”

H-Man:  “I guess not.  If people aren’t buying products now, why would someone invest in additional plant capacity?  The idea of build it and they will come might work for a movie but not in real life.  Adding capacity without demand makes no sense.”

Jordan:  “H-Man, I’m proud of you.  We are starting to make real progress.”

H-Man:  “But what about the government deficit?  All that spending with no new tax revenue scares me.”

Jordan:  “What’s the alternative?  Someone needs to spend the money.”

H-Man:  “I know but the country should not have a deficit.”

Jordan:  “Oh really, H-Man.  Just a bit of trivia.  When was the last time the federal government did not owe money?”

H-Man:  “I have no idea.  OK, under Herbert Hoover?  No, under Teddy Roosevelt.”

Jordan:  “Your second guess is closer but still way off.  Try Andrew Jackson.”

H-Man:  “Really?  That must have been about 1840?”

Jordan:  “Very good.  1835. But remember what you said was the role of government – protecting citizens, creating infrastructure, supporting commerce, helping manage the economy so citizens do not lose all assets.”

H-Man:  “What you trying to pound into my head is the method to execute those roles, especially managing the economy, is exactly the opposite of that of a household and business.  When it makes sense for people and businesses to cut back in harder economic times the government needs to take the opposite approach and spend money.  Otherwise the economy gets worse.”

Jordan:  “Besides the government can pay down the deficit when times are good and tax revenues higher.  You know, like the budget surplus under Bill Clinton.”

H-Man:  “I know.  I know.  And the Republicans under George Bush implemented a bunch of tax cuts and gave away the surplus.  Why did Republicans do that?  Seems like a back-asswards strategy.”

Jordan:  “You mean the people who harped about government deficits, Republicans, turning around and creating a deficit when there was an opportunity to pay down debt?  Makes you wonder if they don’t understand economics, they’re cynical or have yet a different motive.”

H-Man:  “But I still don’t like the idea of government having so much debt.  That’s not right…or fair.”

Jordan:  “OK.  Let me ask you, if the government should not have debt, then what about companies?  Should they have debt?”  And what people?  Should people or households have debt?”

H-Man:  “I suppose some debt is OK.  But not sure how much.”

Jordan:  “You own a house?”

H-Man:  “Yes.  Have for many years.”

Jordan:  “When you bought your first house was the mortgage larger than your annual income?”

H-Man:  “By a long shot.  I guess 2-3 times my annual income.”

Jordan:  “Did anyone think that was a bad idea to take on that much debt?”

H-Man:  “No, everyone thought it was a smart idea.”

Jordan:  “So the same people who think the government should operate like a household told you it was a smart idea to take on all that debt.”

H-Man:  “Yes.”

Jordan:  “But the same people who wanted you to take on debt don’t want government to take on debt?  Is that right?”

H-Man:  “Jordan, I’m having another one of those ‘never-thought-about-it-that-way moments’.  I see what you mean.  Their argument really makes no sense.”

Jordan:  “A lot of their economic arguments make no economic sense.”

H-Man:  “And voters finally woke up and realized that Republicans were selling them phony economic arguments.”

Jordan:  “I call it Republican economic BS.”

H-Man:  “Your economic ideas don’t seem so progressive.  In fact, they seem very rational now that I think about it.”

Jordan:  “Good.  H-Man, no economic rehab for you.”

H-Man:  “I’m sorry this country had all the disruption…but I’m glad there was a Revenge Revolution and we got this country back on track.  We are much better off now and will be for many generations.”