Family Budget Not Equal to Government Budget

May 18th, 2011 at 8:44 am

Heading into work the other day, I heard a Congresswoman on the radio using a common argument that always sticks in my craw—or it would if I knew what a ‘craw’ was.

Here’s the gist: “The federal budget is just like a family budget, and we in government must tight our belts and live within our means just like families do.”

There are similarities which I’ll note below, but it’s almost always used as an argument for cutting everything to the bone right away, and in that sense it’s wrong.

First of all, it’s bass-akwards: when families are tightening their belts, the federal government is the one institution that can actually help the economy—and these belt-tightening families—by loosening its belt and running a deficit.

That deficit should be temporary and should come down when the private economy climbs up off the mat—which again tweaks the analogy: when families start to loosen, gov’t should eventually start to tighten (“eventually” because these transitions can be fragile and if gov’t tightens too soon, it can reverse the early gains–see UK).

But there’s another fundamental way in which this family budget analogy gets misused.  Families borrow to make investments and to get over rough patches.  They run deficits too.  I went into pretty deep debt to finance college and grad school and I’m glad I did.

The whole credit system is based on the fact that if we had to pay cash-as-we-go for everything, we’d seriously underinvest.  And that’s true for families and governments—and yes, you can overdo the borrowing thing.  But to flip too far the other way is equally dangerous.

So, while it sounds good and has some merit, I’d use the “gov’t budget=family budget” argument with care and I’d discount those who want to use it as a hammer to insist on instant cuts.

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29 comments in reply to "Family Budget Not Equal to Government Budget"

  1. MarvyT says:

    Yes, comparing the government’s finances with the family or a corporate budget promotes economic ignorance on a grand scale. Politicians and the lazy journalists who follow them love to love to use these analogies to supposedly put “complex economics” into everyday terms. Even professional economists seem to be ignorant of basic macroeconomic theory. The federal government should be more of a counterweight to the current economic condition. Why has that become so hard to understand?


  2. Brennan B says:

    Perhaps even more important is this dissimilarity: families use money created and controlled by a government, while governments use money created and controlled by themselves. Why don’t prominent economists talk about this fact, and point out that we can use monetary policy to our advantage in many ways that we have not yet? Why all this focus on fiscal policy (tightening or loosening budgets) which is controlled by an insane group of congresspeople, while open seats on the FOMC could be filled with people who would advocate for looser monetary policy? Why is the debate oblivious to this?


  3. Mark Z says:

    Your arugment for the false family budget=government budget analogy makes sense. Guess you got overrulled by the political folks when Obama made that analogy in the State of the Union.


    • Fred Brack says:

      That’s the point I was going to make. If economic illiteracy is a problem, why should the president add to it?


  4. James says:

    That classic Republican trope always gets me as well. It sounds good on the surface, but a moment’s reflections reveals how fundamentally untrue it is. Here’s my version:

    Neither families nor businesses “balance their budgets.” The “balanced budgets” amendments require the government to spend every bit of revenue, no more and no less, that comes in (or give it back) during the fiscal year. But a responsible family doesn’t live high on the hog during the good times, and cut back to nothing during the bad times, letting the mortgage and debts default and the skids starve. In fact, when times are good, responsible people put money away for a “rainy day.” When that rainy day comes, they use the rainy day fund, and borrow money if necessary, until the good times return.

    Similarly, a business doesn’t “balance their budget.” They put assets and funds aside so that when a slump comes along, they don’t have to sell off their inventory and storefront and do business out of the back of a truck. They use reserve funds, and borrow money, as a bridge until the good times return. And they always do, for responsible businesses and families.


  5. Ron Klain says:

    It’s great to see your superb analysis and excellent insights in print, Jared. Now all Americans can benefit from the wisdom and perspective you shared with the President, the Vice President, and your White House colleagues these past two years. Good luck!


  6. Southern Beale says:

    Well they know better of course, it’s just another tired old bromide that people repeat without thinking. I mean my goodness, Newt Gingrich apparently ran up $500,000 on a Tiffany’s credit card. That’s debt, people.

    And isn’t it interesting how in the business press, consumer debt is always touted as a GOOD thing, but in political speeches, it’s presented as a BAD thing. In a May 6 article The Wall Street Journal cheered an increase in consumer credit card debt — the second such increase since 2008 — calling it “a sign of hope that consumer spending could boost an economic recovery that has lost some steam.”

    But a lot of the punditry and politicians like to have their cake and eat it too. It’s simply an example of the politicization of our discourse. People who know better and know a certain amount of debt is stimulative will still spout the old bromide that “American families have to live within their means, why can’t the federal government?” I hear people repeating that lie all the time, people whom I know have had cars repo’d and are riding a mountain of credit card debt.

    So whenever I hear that old chesnut about the government living within its means like the people do, I just repond, “really? Since when have the American people EVER lived within their means? We have some of the world’s highest consumer debt, and the highest personal bankruptcy rates. I’d say in this case the government is an exact reflection of its people.”


  7. Gregor Dodson says:

    I’m really enjoying your posts, a great addition to the blogosphere.

    You have one error in this post however. You have conflated England with the United Kingdom. Scotland, Northern Ireland and Wales are being crippled by the same wrong-headed tory policy, since fiscal policy is run from Westminister for the entire United Kingdom.


  8. foosion says:

    It was deeply disappointing to see Obama use the belt tightening analogy. He had the perfect opportunity to treat the public like adults and teach something and he just adopted Republican talking points.

    Glad to see you clearly endorse counter-cyclical policy. I’m old enough to remember when that was economic orthodoxy, before economic descended into madness.


  9. Nylund says:

    My analogy is one of someone hosting a party. If your guests all show up with tons of booze, you hide yours, otherwise you’ll end up with people throwing up in your plants and dancing on your tables. But, if all your guests are broke and show up without booze, you better go buy some for the party, lest the party turn into an awkward room of silence and inhibition.*

    Like a good host, the government should act in the way that’s best for the (economic) party. This often entails doing exactly the OPPOSITE of what the guests/household do. They bring too much booze, you don’t buy any, they don’t bring enough, you go buy it for them. Ideally, it’d be best if the host could stockpile any left over booze from a big party, so during a quiet one, he can provide drinks by dipping into his reserve stash, and not have to go out and buy more. Even if such a stockpile doesn’t exist though, that’s no excuse to be a crappy host.

    That is to say, boom and bust cycles are bad. The government could, and should, act as a countercyclical force that reigns in manias and provides support during busts. Acting exactly as a household would only creates a pro-cyclical force that exaggerates both the booms and busts. This is not good.

    *Yes, by assumption I am stating that a dry party is no fun.


  10. readerOfTeaLeaves says:

    Bernstein might discount people who use ‘family budget’ as a driving metaphor in budget talks, but I know fine and decent people who fall for it hook, line, and sinker.

    We live in an age of spreadsheets and ledgers; of ‘balance sheets’ and in that world ‘belt tightening’ is exalted as an act of personal self-discipline and responsibility.

    This goes back, in my mind, to a mixed up metaphors: the federal government is *not* a family budget.

    My old Roman History prof taught that ‘Moneta’ was the original bank: the temple where ‘moneta’ (the seed corn) was stored through winter, then passed out to people in the spring for sowing new crops.

    People need to see the distinction between ‘seed corn’ and spreadsheets, but I think it goes right by most of us.

    What the person on the radio was saying was, “Lock up the grainary! Don’t let anyone have seed corn, and if they starve it’s because they lacked the self-discipline to fight off all the rats who came in winter (see also: securitization, mortgage fraud).”

    The person on the radio does not appear to have a functioning concept for ‘seed corn’, or for ‘grainary’, or ‘public goods’.

    In an age when few people have the history background this can be a tough problem. There is plenty of Biblical language to express this ‘seed corn’ concept, but the Dems have not expressed it well.
    IMVHO, the GOP cannot express this concept because they don’t actually understand it.


  11. Chredon says:

    While I agree that the family analogy is far from accurate, that doesn’t mean that we should ignore it completely. Yes, a business or a family can and will borrow money to cover short-term needs, for capital investments (homes, factories), and to tide them over during bad times. But there is a limit to how much an individual is allowed to borrow, but apparently no limit on government debt. Individuals and companies eventually have to pay back that money, but apparently governments do not.

    If governments acted responsibly and paid off their debts during good times, I would have no objection to borrowing so high a percentage of our GDP. But there are no restraints on governemnt borrowing, no limits whatsoever. To continue to hold to a policy of unsustainable debt in the face of dubious need is not good for the long-term outlook of our nation.


  12. Mnemosyne says:

    I don’t necessarily think that the “family budget” analogy is a bad thing, but the way the Republicans use it is idiotic. Using their analogy, if the family ran into financial trouble, the wage earners should actually cut back on their hours at work and earn less (ie cut taxes) because then more money will magically appear.

    In reality, a family facing financial trouble would probably increase hours at work or even take on a second job (ie raise taxes). Only in the bizarro world of voodoo economics would you advise someone in financial trouble to make sure they earn less money than before they ran into problems.


  13. vaccine says:

    Here’s another way the federal government isn’t like a family: families spend their own money, and therefore have strong incentives to manage that money wisely. As one poster noted above, families save in good times to get them through bad. The federal government does not face such pressures. Thus, while many of you talk about the counter-cyclical role government should play, in reality government very rarely “saves up” for the bad times. The political incentives simply aren’t there to conserve in good times. So the counter-cyclical story is just as false, as applied, as the belt-tightening story.


    • BKhghts says:

      I’m pretty sure responsible government saves up for a rainy day. The short sighted, irresponsible gov’t spends everything to get re-elected. See the SS trust fund


      • Vaccine says:

        Please, please find an example of U.S. administration since the 1940s that saved for a rainy day. My point is that the political incentives in the U.S. mean that there is no such thing as a fiscally responsible government.


  14. marc sobel says:

    First of all a craw is what birds use to digest because they don’t get dental.

    And whenever our family budget is out of balance, in addition to cutting spending, we also give away more of our income to rich people. Don’t you ?


  15. Marie Burns says:

    Here’s a way you CAN make an analogy between family budgets and the federal budget:

    When families get in a tight spot financially, there are three things they can do: (1)cut back, (2) borrow, or (3) increase their income. That last one’s the kicker, and it isn’t often possible when unemployment is sky-high, as it is now.

    Government can do the same thing: it can (1) reduce spending, (2) borrow, or (3) increase revenue. That third option is a lot easier for the federal government to do: it can levy and collect more taxes. That isn’t always easy in a time of recession or depression, but it just so happens to be easy — and desirable — now, when tax rates on the rich and effective tax rates on corporations are the lowest they have been in decades and when the income gap between the rich and everybody else is the highest it’s been since the Gilded Age. If we want to return to a viable economy, we must level the playing field, and tax policy at all levels of government is the way to do that.


    • Vaccine says:

      Yes, it is true that the government is quite unlike families in that it can legally steal someone else’s money without their permission.

      But if the government can do that legally, why don’t we let private citizens do the same? Lost your job but don’t want to sell that new car? Just go mug your neighbor Ned. No harm, since Ned can just go mug someone else if he needs money. Pretty soon nobody will have to work since we can all just steal what we need from each other.

      I hear you protesting that if nobody is working, then who is making new stuff for us to steal from each other? Answer: no one.

      And THAT illustrates another difference between families and governments. Family income is earned through effort in exchange for payment, and that effort creates wealth. Confiscation – called “taxation” if the government is doing it, and “stealing” if a private citizen does it – does not create wealth, it merely reassigns wealth.


  16. Nancy Irving says:

    When people like this Congresswoman make this kind of inane argument, ask them why government exists? Is it to do the things that individuals, families and private businesses are willing and able to do themselves?

    No, government exists to do those things that we can’t or won’t do for ourselves, but which are necessary for our common survival.

    During a recession, government spending prevents the economy from spiraling down into depression, because private individuals, families and businesses will not spend when the economy is bad.

    This is one example of government performing its crucial and irreplaceable role.


  17. paul says:

    The other thing the makes the analogy false is that the government doesn’t really have a balance sheet the way that a family or a business does. When a family buys a house or a car or a TV, they recognize that they’re poorer by the amount of the debt or the hole in their checking account, but also that they now own something that gives them an ongoing stream of benefits and that they might be able to sell later.

    For the government (with the exception of CBO scoring for some legislation) there’s really no such calculation. Buy an interstate highway system and poof! in the accounts the money is just gone. Build a CDC or fund NIST and bang! as far as the books go you might as well have burned the money. Imagine a family with a member who has a chronic illness but says, “wow, a lot of money is going out for health insurance, but we’re not getting anything back.”

    And as assets depreciate, families and businesses deal much better than governments. We all know that in 10 years or so it’s going to be time to replace the family car (or the office chair or the PC) but governments always seem surprised to find that there’s a trillion dollars worth of deferred maintenance on road and bridges and water-treatment plants.

    There’s a good reason the government’s books are arranged like this (imagine the political shenanigans over how assets should be valued) but nevertheless it goes along with — and encourages — makes for seriously skewed priorities in government spending even when times are OK.


  18. Melody says:

    In a pique, I suggested some solutions for those who continue to push the ‘family budget = government budget’ false equivalency.
    ‘We’re a Nation–Not a Family” at http://my.firedoglake.com/otchmoson/

    While increasing income (raising taxes) seem the route most ‘families’ would take, if ‘cutting’ becomes the optimal solution, let’s start at the top of the food chain instead of at the bottom.


  19. Vaccine says:

    Here is another, very thoughtful take on the “Family Budget” analogy which describes the reaction by all you Keynesians and discuss some of the other implications:

    http://mises.org/daily/5304/Can-Governments-Finances-Be-Compared-to-a-Households


  20. Anne says:

    Another BIG difference between a government and a family (or individual) is that individuals get old and die and the need to save or prepare for non-working years (for example, by getting the house paid off) is a big driver of an individual’s budget. Whereas the government is immortal.

    It’s a really stupid analogy and it makes me furious whenever the President (that I voted for but never would again) uses it.


  21. Maria says:

    After recently suffering through a ‘Town Hall’ meeting from my Congressman, this analogy has been ‘chapping’ for a couple of days now. I want to entertain this simplistic analogy so often made.
    I grew up one of five children. My parents came to this country in order for my father to further his studies in engineering. He already had a degree in mathematics, my mother in pharmacy. My parents embraced the notion like so many of their friends that America is an idea — of freedom and opportunity. As our President has said, “in no other place could this story be possible”. As a family, our ‘budget’ was focused on creating and investing in a future and legacy to build upon. We all spent 12 years in private school and did not ask for ‘vouchers’ to pay for them. My parents set education as a priority because they knew that education was an investment in the future and the gateway to unlimited opportunity. When the investment in the future is set as a priority, you place laser focus on making it a reality. For our family it meant my parents– while working full time and obtaining advanced degrees of their own, worked SECOND jobs — yes they addressed the challenge of quality education by creating MORE REVENUE. I have to say we helped too. We worked. Had jobs and found creative ways to pay for or make the things we wanted. When the price of gas became untenible — my mother said she was not going to work to support a car and then, invested in public transportation by getting a bus pass. I illustrate these examples as we were one of many families that look at the budget not just as limits and restrictions, but how you invest what you have today for the maximum payoff and benefit in the future. Education is not an ‘expense’, it in an investment in revenue generation. When the price of gas becomes too high, you stop giving oil companies your money. Many families — with their eyes fixed on the future are willing to make the investment in the priorities for future payoff. At some point as you run a business or a household (maybe even a government), and have to recognize what are fixed costs — just as food and shelter for your family, and have the financial and emotional creativity and ambition to look to REVENUE GENERATION to work yourself out of a hole. To suggest that all you have to do is spend less money is financially and intellectually lazy and does not remotely resemble the character of this country or the people that make it the greatest nation in the world.


  22. whalleyz says:

    A couple observations… it seems to me that what’s really being discussed here is the difference between microeconomics (families) and macroeconomics (government).
    Also, with regard to this statement, “The whole credit system is based on the fact that if we had to pay cash-as-we-go for everything, we’d seriously underinvest.” I think that’s true for most families and individuals, however, there’s a point at which enough wealth can be accumulated that this doesn’t apply.


  23. Lars Olsson says:

    Heading into work the other day, I heard a Congresswoman on the radio using a common argument that always sticks in my craw…

    Came across this old post as a result of doing a search in the wake of another politician saying virtually the same thing on the radio earlier this week:

    Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.

    I think you might know this guy. Your old boss. Any thoughts on hearing him saying the exact thing that “stuck in your craw” from the politician you heard on your way to work?


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