Monday, July 25, 2011

Bad belt-tightening metaphors

A commonplace among politicians that drives me crazy is that "government must live within its means, just like families."

The problem is that families don't, at least within the meaning implied by the above statement.  Personal income in the United States is about $12.9 trillion.  Mortgage debt outstanding is about $10.5 trillion.  Consumer credit outstanding is about $2.4 trillion.  So the ratio of consumer debt relative to consumer income is similar to US government debt to GDP.

I am not saying we needn't worry about long term fiscal balance--we do.  As I have said before, we must, among other things, return tax revenues to at least their long-term mean as a share of GDP, and bend the cost-curve for health care--something that Obamacare actually tries to do. But bad metaphors that basically dishonestly flatter people are not helpful.


Nylund said...

First of all, the main reason its a bad analogy is because it suggests doing exactly the wrong thing. You want the government to be counter-cyclical so it can moderate the extremes of the business cycle.

I like to think of it like hosting a party. If all your guests show up holding cases of booze, you should hide your alcohol lest every get too drunk and start puking in your plants. But, if everyone shows up empty-handed, you should make a trip to the liquor store and provide for the party, lest it die.

Second, if you follow the family analogy as politicians intend it, but apply it back on the family, that would mean that a family should never take out a mortgage to buy a house, never take out a student loan to send a child to school, and never take out a small business loan to expand the company business. Its ridiculous to assume the borrowing is inherently bad. There is a time and a place for it, and right now is one such time (see point 1 on counter-cyclical policy).

Rockfox212 said...

An even bigger mistake in the "government is like a household" is that for a country the spending IS the income. Less spending means less income.

So the only similarity would be with a totally self-sufficient house, like Little House on the Prairie. And in that case the fallacy would immediately become obvious. Less work output would mean less food in, a self-defeating spiral.

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