Government-Household analogy

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The Government-Household analogy refers to rhetoric in political economic discourse that compares the finances of a federal government to those of a household. The analogy has frequently been made in debates about government debt, with critics of government debt arguing that greater government debt is equivalent to a household taking on more debt. [1] [2]

The analogy has been characterized by economists as misleading and false, as the functions and constraints of governments and households are vastly dissimilar. [3] [4] [5] [6] Differences include that governments can print money, [7] [8] [9] interest rates on government borrowing may be cheaper than individual borrowing, [7] [8] governments can increase their budgets through taxation, [7] [8] governments have indefinite planning horizons, [10] national debt may be held primarily domestically (the equivalent of household members owing each other), [10] governments typically have greater collateral for borrowing, [11] and contractions in government spending can cause or prolong economic crises and increase the debt of the government. [6] For governments, the main risks of overspending may revolve around inflation rather than the size of the debt per se. [9] [10]

According to economist and Nobel laureate William Vickrey, [3]

This fallacy seems to stem from a false analogy to borrowing by individuals. Current reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees, and other charges. This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public investment takes place in infrastructure, education, research, and the like. Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity. Deficits in excess of a gap growing as a result of the maximum feasible growth in real output might indeed cause problems, but we are nowhere near that level. Even the analogy itself is faulty. If General Motors, AT&T, and individual households had been required to balance their budgets in the manner being applied to the Federal government, there would be no corporate bonds, no mortgages, no bank loans, and many fewer automobiles, telephones, and houses.

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In economics and political science, fiscal policy is the use of government revenue collection and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables developed in reaction to the Great Depression of the 1930s, when the previous laissez-faire approach to economic management became unworkable. Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics theorised that government changes in the levels of taxation and government spending influence aggregate demand and the level of economic activity. Fiscal and monetary policy are the key strategies used by a country's government and central bank to advance its economic objectives. The combination of these policies enables these authorities to target inflation and to increase employment. In modern economies, inflation is conventionally considered "healthy" in the range of 2%–3%. Additionally, it is designed to try to keep GDP growth at 2%–3% percent and the unemployment rate near the natural unemployment rate of 4%–5%. This implies that fiscal policy is used to stabilise the economy over the course of the business cycle.

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<span class="mw-page-title-main">Public finance</span> Study of the role of government within the economy

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References

  1. ↑ Barnes, Lucy; Hicks, Timothy (2021). "Are Policy Analogies Persuasive? The Household Budget Analogy and Public Support for Austerity". British Journal of Political Science. 52 (3): 1296–1314. doi: 10.1017/S0007123421000119 . ISSN   0007-1234. S2CID   236257379.
  2. ↑ Todorova, Zdravka (2007). "Deficits and Institutional Theorizing about Households and the State". Journal of Economic Issues. 41 (2): 575–582. doi:10.1080/00213624.2007.11507047. ISSN   0021-3624. JSTOR   25511211. S2CID   12865008.
  3. 1 2 Vickrey, W. (1998). "Fifteen fatal fallacies of financial fundamentalism: A disquisition on demand-side economics". Proceedings of the National Academy of Sciences. 95 (3): 1340–1347. Bibcode:1998PNAS...95.1340V. doi: 10.1073/pnas.95.3.1340 . ISSN   0027-8424. PMC   18763 . PMID   9448333.
  4. ↑ Editor, Philip Aldrick, Economics. "BBC 'misled viewers' on scale of national debt". The Times . ISSN   0140-0460 . Retrieved 2021-07-19.{{cite news}}: |last= has generic name (help)CS1 maint: multiple names: authors list (link)
  5. ↑ Krugman, Paul (2015). "The austerity delusion". The Guardian. Retrieved 2021-07-19.
  6. 1 2 Wren-Lewis, Simon (2015-02-19). "The Austerity Con". London Review of Books. Vol. 37, no. 4. ISSN   0260-9592 . Retrieved 2021-07-19.
  7. 1 2 3 "How The Federal Budget Is Just Like Your Family Budget (Or Not)". NPR.org. 2013. Retrieved 2021-07-19.
  8. 1 2 3 "Why the federal budget can't be managed like a household budget". The Guardian. 2013-03-26. Retrieved 2021-07-19.
  9. 1 2 Smith, Warwick. "Why the federal budget is not like a household budget". The Conversation. Retrieved 2021-07-19.
  10. 1 2 3 "Does the National Debt Matter?| St. Louis Fed". www.stlouisfed.org. Retrieved 2021-07-19.
  11. ↑ Gordon, Roger H.; Varian, Hal R. (1988). "Intergenerational risk sharing". Journal of Public Economics. 37 (2): 185–202. doi:10.1016/0047-2727(88)90070-9. hdl: 2027.42/27078 . S2CID   52202708.


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