[This is an old post of mine, but high-ranking politicians continue to get this wrong, so I'm forced to recycle it.]
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.