Negative Numbers: Understanding Federal Spending

In pre-algebra, students use a number line to help them learn to add and subtract negative numbers. Starting out, the concept may seem difficult for some, but really, it isn’t. For instance, consider the following statement:

-1 + -2 = -3

Pretty straight forward. Just add and don’t forget to leave the (-) sign in place. Zero, (0) being the absence of value, is the balancing point between two infinities: Positive numbers and negative numbers.

To (+) Infinity <--- 5. 4. 3. 2. 1. 0. -1. -2. -3. -4. -5 ---> To (-) Infinity

People will accept this reality at face value, because numbers stretch to infinity, whether they be positive or negative. The same also applies to federal spending. Yet here, most people will not accept this reality, because to them, dollars are not numbers. Rather, they believe that US dollars are commodities; tangible objects that do not stretch to infinity. The technique used to explain federal spending to them, relies on something that resonates with people: that of household spending.

Here, they are asked to imagine their own household. They’ve got some income. If they spend more than they earn, they go into debt. If they cannot earn more dollars to pay back the debt, then they go broke. Simple. And the federal government’s budget is just like this too. It has no money of its own. So, it must earn some dollars. Two ways that the federal government can do this is by taxing or borrowing. The only difference between a household and the federal government, is that a household cannot tax. Nevertheless, that is how the federal government earns its dollars: It steals from us. Yes, you see, it steals from you and I, then turns around and gives our hard-earned “money” to someone else who doesn’t deserve it. Now, if the federal government spends more than it earns, it has a deficit. How does the federal government spend more than it earns? Well, once it reaches zero, it has no dollars left, so the federal government cheats the system and prints more money to keep spending. And when it does this, it makes our dollars less valuable and then hyperinflation is knocking at the door.

Hence, the misuse of the gold standard era term, “printing money” and silly statements such as, “Obama is wearing out his arm cranking the handle on the printing press, printing more money to pay China the rent.” Of course, the household analogy is errant, the result of trying to apply the micro level to the macro level. It is pure fantasy.

As I’ve mentioned numerous times in many articles, the US dollar is nothing more than a number with a “$” symbol in front of the number. As numbers stretch to infinity, so does the supply of US dollars available to the US government. That supply of US dollars must always equal infinity. However, unlike numbers on a number line, US dollars do have a constraint: Inflation. The reason is that these numbers that the federal government issues with a “$” symbol are used to buy goods and services and the resources to create those goods and services are not infinite. Now, the US government could ignore this constraint and try to spend to infinity if it really wanted to. Any government can destroy its economy if it so chooses. But, if the federal government wanted to spend to infinity, it would outstrip the real ability of the economy to produce and demand-pull inflation would occur. Regardless, the US dollar is still just a number and the supply of those dollars to the federal government still equals infinity. At no point in time does the US government have US dollars or not have US dollars. It simply spends them into existence, because it has an infinite capacity to do so.

Since it possesses an infinite capacity to spend as it is the monopoly issuer of currency, the US government can reasonably spend to create and maintain full employment and install various necessary public services such as, national healthcare, Social Security, infrastructure, military, etc. Should inflationary pressures rise, then that is what federal taxation is for: to reduce spending power, thus putting the brakes on inflation. Federal taxes are not a funding mechanism of any kind. So, yes, the federal government can afford to buy whatever it wants to buy, as long as it is for sale in US dollars.

Knowing that the US dollar is just a number, we can use a number line to help us understand federal spending. There are three sectors in the economy: The government, the domestic private and the external sector. Each of the three sectors can be placed on a number line.

Government Sector:
5. 4. 3. 2. 1. 0. -1. -2. -3. -4. -5

The Domestic Private Sector:
5. 4. 3. 2. 1. 0. -1. -2. -3. -4. -5

The External Sector:
5. 4. 3. 2. 1. 0. -1. -2. -3. -4. -5

Now then, a deficit results in a negative number and a surplus results in a positive number. If after you’ve paid all of your bills and bought the necessities, you run out of dollars and need to use credit cards to spend, that is a deficit. So, it is a negative number. If after you’ve paid all of your bills and bought the necessities, you have any dollars left over, that is a surplus. So, it is a positive number. However, the government sector issues the currency, therefore, it needs no income to spend. If it does not spend more than it taxes, then the other two sectors will not have an income and the economy will stall or end up in a recession if the federal government eventually runs a surplus.

When the federal government spends, if it wishes to add more dollars to the non-government sector to maintain or boost aggregate demand, then it must spend greater than that which it takes out of it in taxation. So, it must run a deficit. A federal deficit must result in a negative number for the federal government and a positive number for the non-government sector. Why? Because somebody’s spending is somebody’s income. If someone spends $5, somebody is getting $5. Whoever spent the $5 has lost $5 (-$5) and somebody has gained $5 (+$5). The same $5 cannot be in two places at once. It must move from me to you, from Bob to Jane or from government to non-government. When it moves, it becomes income for you, Jane, or the non-government sector and an expenditure for me, Bob or the federal government. Let us assume that the federal government deficit spends $5. The $5 could be distributed in any combination within the non-government sector. We will say that $3 is in the domestic private sector and $2 is in the external sector. Expressing federal deficit spending of $5 on a number line, we can see the concept clearly.

Government Sector:
5. 4. 3. 2. 1. 0. -1. -2. -3. -4. (-5)

The Domestic Private Sector:
5. 4. (3). 2. 1. 0. -1. -2. -3. -4. -5
The External Sector:
5. 4. 3. (2). 1. 0. -1. -2. -3. -4. -5

-5 + ( 3 + 2) =
-5 + 5 = 0

Next, for clarity and familiarity, we will just combine the domestic private sector and external sector into just one sector and we will call it “the private sector”. Remember, this is just for clarity and familiarity.

Let us assume that the federal government will deficit spend $8.

If the federal government deficit spends $8:
10. 9. 8. 7. 6. 5. 4. 3. 2. 1. $0. -1. -2. -3. -4. -5. -6. -7. (-8). -9. -10

Then the private sector gains:
10. 9. (8). 7. 6. 5. 4. 3. 2. 1. $0. -1. -2. -3. -4. -5. -6. -7. -8. -9. -10

-8 + 8 = 0

Now, let us assume that the federal government wishes to tax more than it spends and run a federal budget surplus of $6.

If the federal government surplus is $6:
10. 9. 8. 7. (6). 5. 4. 3. 2. 1. $0. -1. -2. -3. -4. -5. -6. -7. -8. -9. -10

Then the private sector loses:
10. 9. 8. 7. 6. 5. 4. 3. 2. 1. $0. -1. -2. -3. -4. -5. (-6). -7. -8. -9. -10

-6 + 6 = 0

Lastly, let us assume that the federal government wishes to balance its budget and spend only what it taxes. We will assume that it spends $5 and then taxes $5.

If the federal government spends $5 and taxes $5:
10. 9. 8. 7. 6. 5. 4. 3. 2. 1. ($0). -1. -2. -3. -4. -5. -6. -7. -8. -9. -10

Then the private sector gains nothing:
10. 9. 8. 7. 6. 5. 4. 3. 2. 1. ($0). -1. -2. -3. -4. -5. -6. -7. -8. -9. -10

-5 + 5 = 0

If we compact the concept into a single number line, we can express a federal deficit of $5 as:

Private Sector <--- (5). 4. 3. 2. 1. 0. -1. -2. -3. -4. (-5). ---> Gov Sector

And we can express a federal surplus of $5 as:
Gov Sector <--- (5). 4. 3. 2. 1. 0. -1. -2. -3. -4. (-5). ---> Private Sector

And a balanced budget as:
Private Sector <--- 5. 4. 3. 2. 1. (0). -1. -2. -3. -4. -5. ---> Gov Sector

As we can see, the federal government must be negative in US dollars for us to have positive US dollars. Therefore, in a stalled or recessed economy, if the federal government runs a budget deficit of $2 trillion dollars (-$2 trillion), then the non-government sector will gain, exactly to the penny, a $2 trillion surplus (+$2 trillion).

-2 trillion + 2 trillion = 0

Thus, there is always balance. Whatever the federal government spends, that exact amount, to the penny, will be found outside the government sector somewhere, even if $200 of it is in the pockets of someone in Italy. But keeping with the more familiar term “the private sector”, federal spending is income for the private sector. When the federal government taxes, US dollars are flowing out of the private sector and into the government sector to be destroyed.

What we can understand now about federal spending is that when US dollars are in the negative range for the US government, it is just a reflection of the fact that the US government is doing its job as a currency issuer. It is issuing US dollars to provide you and I with the US dollars that we need to operate our economy. If you wish to view the economy from the political perspective of “takers”, meaning “who are the takers?”, then you will have to come to terms with the following reality:

The US government doesn’t take before it gives. It always gives first and then takes some away for various reasons unrelated to funding its giving.

You and I, Walmart and Wall Street are the actual “takers” (if you wish to argue about who the “takers” really are) and occasionally, we are all asked to give back so that the US government can clear a spending space to give again for the benefit of all. If it did not take some of what it has given away, then eventually that giving would outstrip the real ability of the economy to respond with output and inflation would occur. The problem that we face today is not inflation from government spending, but rather, the problem is that we’re allowing the federal government to clear a spending space to give and give again only for the benefit of a few. You simply cannot successfully operate an economy in such a dysfunctional manner.

When it comes to US dollars, the federal government’s negative is our positive. That is how a modern monetary system works.