Zero Sum Games, and the Economics of a Nation

Lets talk about Zero Sum games.  (Hooray!  This is going to be fun!)
Less sarcasm please.

Seriously, lets take a look at the economy of a country.  Broadly speaking, you have the Public Sector and the Private Sector

Public Sector:  Also known as Gummint.  This is all the money spent by the Gummint to do whatever the heck that Gummints do.

Private Sector:  Everything that isn't the Gummint.  All the goods, service and whatever else that goes on in the country.  Mind you, this even includes the underground economy, i.e., you pay the local kid $20 to mow your lawn, and don't give him a 1099.

So, where does the Gummint get its money?  I mean, they have to pay the Army, Congress, DMV, etc, right?
The first (and actually quite wrong) answer is "They print it".  Which is kinda sorta vaguely true, except that its actually none of them, and is in fact quite false.

The government gets all (actually most, but more on that in a bit) of its money via Taxes.

• You want a new interstate system?  Fine, hike the tax-rate by a percentage point or two, collect the money that rolls in, build your interstate system, and you're done.
• You want to increase the size of the Air Force?  Get a new Ballistic Missile Sub? Death-ray satellites?  Taxes!
• etc.

Mind you, these Taxes are all (again, most, but whatever) on the Private Sector.  Assuming that all economic activity in the Private Sector is taxed, then the more economic activity there is, the more money the Gummint gets in taxes.  Conversely, the less activity in the Private Sector, the less the taxes.
"So?" you say.  "Who cares about 'less'?"
Aha, I'm glad you asked.
Lets say that the entire economic activity in the country is $10 Billion.  And the new Ballistic Missile Sub that you desperately need to protect yourself against the evil nation of Lichtenstein costs $20 Billion.  Whats to do?  You obviously can't tax the entire Private Sector 200% of their income, right?

Enter Sovereign Bonds.

Sovereign Bond:  A "National I.O.U".  The country basically sez. "Gimme $20 Billion today, and I'll pay you back in 30 years at 3%/year interest". (or 4%, or 5%. The interest rate is actually based on what the country can get away with, or "what the market will bear")

These bonds are purchased by both citizens and foreigners, and therein lies a very important point.  In the end, the Gummint is financed with a combination of Taxes and Sovereign Bonds.
Thats it.
Thats the Zero Sum Game we are referring to.

Whats my point?

Imagine a country in Recession.  The economic activity in the country is slowing down, and consequently, the taxes paid are also decreasing.  The country can either

1. cut the public sector by the same percentage (ok, not really doable), or 
2. increase the number of bonds that are sold to pay for everything (in short, run a deficit).

There is no third option!
Cutting the public sector (Gummint size) and the number of bonds sold is not, repeat, Not an option!

I wish people would actually keep this in mind before making Stupid Economic Statements.

Note:

Why not cut both?  Consider what happens.

• You don't sell more bonds, and consequently cut Government expenses by the same percentage as the decrease in taxes (say, 10%).  
• As a result, you now fire, say 30% of the government (Army, DMV, congressional staff, whatever).  
• Since all of those people are now unemployed, they are no longer paying taxes.  Whats worse, they and others are also cutting back on other economic activity - not going to movies, not buying cars, not traveling, etc..
• This reduces economic activity even more and reduces the amount of taxes coming into the Gummint.
• So the Gummint fires even more people
• Net result?  Doom Loop city.

This is also one of the major reasons behind Unemployment Benefits.  Its an Automatic Stabilizer, where, once you lose your job, you continue to "do stuff", and not send the economy into a Depression Tailspin...