If a family’s debt continues to grow and grow, it usually leads to serious trouble, perhaps including bankruptcy. You hear regularly that the federal government’s debt is rising rapidly and, like a family, it must cut back and live within its means. Even if the analogy is not used, it seems a near consensus that current federal debt is an immediate crisis that must be dealt with now.
When the National Commission on Fiscal Responsibility and Reform, popularly known as the Bowles Simpson commission, issued its final report, the accompanying member statements from Republicans and Democrats alike all seemed to all echo this with words like “unsustainable”, “impending financial doom” or even one of the “most significant threats facing our country.”
On the surface, the analogy seems compelling. Most of us have had times when we weren’t sure we could pay our bills and so realized we had to cut back. Why wouldn’t the federal government be like that?
It isn’t.
False refutations
The “government budget is like the family budget” analogy has its critics. Authors from Laura Tyson to the Roosevelt Institute attack it. But their criticisms do more harm than good. They point out that the federal government can print money, but a family cannot, or that you have to accept U.S. currency as valid, but not necessarily accept a promissory note from a family. And hey, they say, at least we’re not anywhere near as bad as Greece.
These explanations turn the family analogy into a story about a wild child with an indulgent father who will always bail them out; that’s not really where we want to go.
Krugman to the rescue
A better explanation of the difference is made by Paul Krugman in his book, “End this Depression Now!” In it, he explains the problem with this analogy. Suppose that the economy was a hundred families, all buying and selling to each other. A number of those families decide they are overstretched and decide to cut back expenses to meet income.
Other families are looking to earn money by doing work. However, they have problems finding work because families have cut down their purchases of goods and services. So their income goes down and now they are more in debt than when they started. So they also decide to cut back expenses. The economy risks spiraling down into a serious depression with all of the families trying to cut back and discovering that their income is also decreasing.
“My spending is your income. Your income is my spending.” That is how Krugman summarizes his argument. If a good fraction of those 100 families cut their spending, they have now shrunk the economy, plunging it into recession. And there is no way, no way at all, that further shrinking of expenses will lead to our 100 families becoming solvent.
What’s good for an individual family turns out to be a big problem for the economy as a whole.
Analogies and fallacies
Analogies work by making a comparison between two things. Most of the time, we never explain our analogies, we just assert them. A good analogy is compelling. But analogies are not proof, not unless you explain just how the two things are like each other.
To say that “the family budget is like the federal government budget,” is to invoke some notion of fairness. We have to budget, why shouldn’t the government? The family sitting around the dinner table assessing its expenses seems comfortable, friendly, the epitome of ‘homey.’ Controlling your family debt seems sober, responsible, the proper thing to do.
The economy of the nation is complex, deals in numbers like billions and trillions, and has too many moving parts; it’s hard to get a grasp on it. To make the analogy is to cut the national economy down to a comforting size that we can understand.
There is a classic fallacy called “whole for the parts.” The whole is not necessarily like the parts. The atoms that make up your body are not alive – but you are. And the economy as a whole does not operate like the parts of it do. The sum of the economy operates by different rules than its people, companies and families do.
Rescuing the families in the economy
The solution, Krugman argues, is that if individuals cannot spend their way out of recession, then the government has to. When no one has money, and no one is big enough to have an effect during a recession or depression, then it is precisely the job of the government to spend and spend in order to restart the economy.
If the stimulus program had been significantly bigger, we’d be on our way to robust economic recovery by now. Yes, the deficit would be even bigger – for now. And it would also be true that millions of Americans whose lives are on hold, their hopes and dreams deferred or dashed forever, limping along without the health care or work they need would be better off.
That’s the trade off. Which damage would you accept? That in the future we may pay more for our debt out of a bigger economy, or that we write off millions of people and their plans for the future?
A bigger federal deficit is exactly what the entire economy needs – for now.
But what about the deficit?
I’ve written about the federal government deficit before. The short version is that a) our deficit is not a current crisis because interest rates are low and unemployment is holding down federal revenues, and b) the best way to pay the debt is to grow the economy so the deficit becomes a smaller fraction of the GDP.
Krugman’s point is that the time to control spending and lower the ratio of deficit-to-income is during times of economic prosperity when our 100 families are earning and spending and don’t need help from the government.
Deficits mean investments
People run deficits all the time based on their desire to fund investments for a better future. People take out loans to go to college, to go back to college, to start a small business, even to buy a car. All of these involve a faith that we’ll still be here in the future.
Running a bigger deficit to fund investments in schools, highways, high-speed rail, bridges, sewage treatment plants, repair of environmental damage, expansions of the Internet and other concrete things we need for the future is not being irresponsible. It’s having faith that America has a future.