People seem to be reaching for analogies between prudent family budgeting and federal government budgeting.  I try to point out the huge differences between an individual family and the government.  However, I have thought of an analogy that may make it easier to understand what the government is trying to do.

The point of the following story is that sometimes there is capacity in the system to produce goods that people need.  Factors like lack of credit (money) or lack of faith in the future cause people to stop spending.  The irony is  that  there is still the need,  the capacity to satisfy that need, and something of value to exchange for satisfying that need. Yet the system is frozen into inaction.

Suppose you do not have enough money for a meal.  However, you happen upon a restaurant that needs its sidewalk shoveled.   You offer to shovel their sidewalk, but they have not made enough money today to pay for it.  You discover that they are about to close for the afternoon and dispose of their excess prepared food.. So, you bypass the money issue by agreeing to do the shoveling in exchange for the meal.

The restaurant agrees.  They get their sidewalk shoveled for no expenditure of cash.  You get a meal (for no expenditure of cash) that they had already prepared and would have thrown out.  Both parties to this deal are far better off than they were before the deal was struck.

Nothing fundamental changed in the situation, yet you were able to consummate the exchange once you realized that the money problem was an artificial barrier.

The deal works without upsetting any economic balance because you both had excess capacity that was going to waste.  You had the time and energy to shovel a sidewalk and they needed a sidewalk shoveled. You needed a meal and they had food that would have gone to waste.  All that was missing was something to get over the hurdle of what was preventing the deal from going forward.

In the current economic downturn our economy has trillions of dollars of excess capacity.  Our society has the needs that could be satisfied by putting that excess capacity to work.  The federal government can step in to make it happen.  Rather than use a barter system, it facilitates the trade of people’s labor for the wages and manufacturing capacity of business by fooling them into thinking there actually is enough money.  Business gets to earn money for the use of its facilities.  Everyone comes out a winner because there were excess capacities on both sides.

The signal for when to stop this intervention is when the excess capacity is all used up and normal activity is sufficient to keep every one occupied without the help of the government.  Eventually the government gets to extract the money that it pretended was available by taxing the booming economy.

This is what should happen unless people get the idea that there is no need to extract the excess money from the economy (pay off the debt). If you had made structural changes to the tax system so that the boom does not get taxed, then you upset the balance. For some reason when the economy is running full tilt, people get the idea that it can run even fuller tilt.  This is where you hope some adult can step in and explain the facts of life.