What is Fiscal Profligacy?
In bad times, and when accounting gimmicks are rampant, a government’s fiscal policy is best understood as a portfolio of options positions, not in terms of a static balance sheet.
Read the whole post. There is much, much to think about here.
For example, one argument for government intervention in many areas is that government can provide insurance where markets cannot do so. That is because government has so many more ways to spread risk across people and across time.
But one way to read Tyler’s point is that the government still manages to write more insurance policies that it can really cover. Some of the risks are correlated, and they become more correlated in bad times. When the government insurance company goes bankrupt, things get ugly.