Family Budget Not Equal To Gov’t Budget: Reposting

July 7th, 2011 at 8:23 am

[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.

 

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13 comments in reply to "Family Budget Not Equal To Gov’t Budget: Reposting"

  1. foosion says:

    Government fiscal policy should be counter-cyclical. It should zig when the economy zags.

    It’s better to borrow when rates are low. There are things govt must do, such as rebuild roads, bridges and other infrastructure. A rational family would do so when things are on sale rather than waiting until they are more expensive.

    For Obama to adopt the GOP anti-govt, anti-middle talking points is lunacy. “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.”

    Doesn’t he understand economics? Didn’t anyone try to educate him?


    • John says:

      Thank you for including that quote, foosion. And I couldn’t agree more.

      Not (just) a congresswoman, JB. The President.

      David Frum nailed it. Via Josh Marshall @ TPM:

      http://talkingpointsmemo.com/archives/2011/07/no_outside_game.php?ref=fpblg

      I really can’t believe anymore that he’s really a Democrat. It feels like he’s a plant, a trojan horse, a Republican… A Manchurian President.

      Obviously he’s getting really bad advice, but the quote foosion gave – I watched him say it, several times. He believes it, clearly, as wrong as it is.

      “Lasciate ogne speranza, voi ch’intrate.” (Inferno, Dante)


  2. Peter Akkies says:

    Here’s a suggestion for an analogy:

    The government’s belt is more like a seat belt: when you’re driving fast (GDP growing fast) you pull it tight, but when you’re going at a snail’s pace (GDP growth is low), you don’t have to worry about it too much.


  3. Gene Hayward says:

    I can see Dr Bernsteins point about deficit spending IF the majority of the budeget was composed of discretionary spending that can be ramped back rather easily. BUT does this relationship he describes change/breakdown when the majority of the budget is composed of non-discretionary spending (or discretionary military spending, which may as well be considered non-discretionary). Is it really the entitlements that are putting the pressure on deficit spending and CANNOT be ramped back when the economy improves. To use the seatbelt analogy, wont the belt be loose regardless of the speed of GDP because to the growth in entitlements. Thank you in advance for any positive response…


    • Kozlowski says:

      This is a very intelligent question and since no one else has picked up on it I think I will.

      The rest of you appear to be willfully negligent in understanding the true dynamics of our current situation.

      Yes, Econ 101 would say and I would not disagree with the idea of counter cyclical deficit spending. Makes sense.

      However our current situation is far from normal. We are in a place where our debt & deficit are threatening the stability of the world economy. We are on uncharted ground in terms of the outsize effect this debt/deficit will have. The repercussions political and otherwise are a big unknown. Its not the % of GDP relative, in those terms we are not really on uncharted grounds, the problem needs to be understood in real dollar terms vis-a-vis its parity with other currencies and the fact that we are still the primary reserve currency upon which the world depends. For now.

      Surely you people realize this, no?

      Its no longer a matter where economic theory applies. We are uncharted grounds. The US deficit is the giant sucking sound you hear, it used to be the #1 safest investment or thereabouts and the dollar the reserve currency backing up a global financial system that is no longer connected to Bretton Woods and its largely digital bits, interconnected and non-linear. Not given to predictability.

      Uncharted grounds indeed.

      If we do not get our financial house in order and soon, and prove to the world that we can run a responsible economy (less politicking and more pragmatism would go a long way right about now for all sides in this mess), the consequences will last far longer than just a real bad recession.

      The consequences of the battle being fought will resound for generations (possibly). It will determine if we remain a reserve currency. Does anyone know how much of a boost this gives to our economy in general? Exporting little bits of green paper for $100 each? I know its significant but would be nice to understand its real impact and have it be known to one and all just how important this is. Congress & President are playing with the future of the world economy at present.

      Good luck.

      Cheers!


  4. John says:

    A Congresswoman?

    JB, Obama said it yesterday!!!


    • foosion says:

      The first line of today’s post:

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


  5. urban legend says:

    Obviously, the President learned absolutely nothing from Jared while he was working in the White House.

    Jared, I think you owe us an in-depth and honest explanation of what role you were allowed to play in formulating White House economic policy. Where in the world is the President picking up his third-grade understanding of economics?

    This all reminds me of something I read about how Obama became President of the Harvard Law Review: he knew how to make both sides in a big dispute about the role of the Review feel he was on their side. I am getting the distinct feeling that Obama is brilliant at making people think he is brilliant, when in fact his understanding of major issues — certainly economics — has no depth whatsoever. I don’t think he has a clue how fatally wrong the family analogy is. He simply knows that many Americans believe it, and it makes sense to his University of Chicago-influenced comprehension of economics, and so he keeps repeating it. It polls well.

    We’ve all seen people who in person have that ability to mesmerize people, while at some point we catch them in a moment when we realize they are mouthing words they really do not understand. I am coming to believe the President is one of those people.


  6. urban legend says:

    The worst of it is that the American people would love to be told, correctly, that while the deficit is something we need to manage in the long-term, the lack of jobs now is what must take priority for our immediate attention; and that, unless more people are at work making good incomes and, therefore, paying taxes, we will never reduce the deficit anyway.

    Besides Americans already out of work or threatened with it, Americans with college-educated young adult children waiting tables or sitting on basement couches (or threatened with that while still in college), not to speak of those young adults themselves, would especially like to hear that well-paying jobs must be our first national priority. It does no good to save children from paying interest on borrowed money sometime over the next 30 years by throwing them or their parents out of work now. Which raises a question: can anyone in the White House string together a few simple, one-syllable, Anglo-Saxon words about our economic condition that compete with rather than mimic what people hear on Fox News?


  7. David says:

    And also, family’s can’t mint money, or at least they shouldn’t. Being in debt for money that you can control is different from being in debt for money you must acquire. If family’s could print money in their basements they wouldn’t be as worried about their debt.


  8. denim says:

    So do you think our government policy directors “learned” that misinformation from a lawyer-MBA dropout or a Doctor of Economics?


  9. Misaki says:

    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.

    Prima: But what about the children!

    Secunda: Eh? What about them?

    Prima: I dunno, just thought I’d mention them.
    (from Monkey Island)

    (reusing a joke probably makes it not funny… I used this at Economist’s View already, but it illustrates the point)


  10. bakho says:

    Middle Class and poor families step up and help family members that lose their job by paying them to do work around the house, giving them a place to stay, feed them and other benefits to help them through their misfortune.

    The belt tightening is what a wealthy elite would do if his million dollar bonus failed to go through. Our wealthy elite might cancel that tony vacation and would certainly give less money to charity.

    It isn’t just idiot Congressmen that are making this argument. Mr Obama himself repeated the family belt tightening argument. It goes to show how much of an elitist Obama is and how tone deaf he is to real families and how they behave when misfortune strikes. TONE DEAF


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