The Missing Piece in the Private Finance Analogy
In their dueling speeches on the debt ceiling impasse, both President Obama and Speaker Boehner reached for a very familiar analogy between the government and private actors. President Obama analogized our situation to that of a family that is maxing out on its credit card. Speaker Boehner contrasted the responsible behavior of companies that balance their books with the behavior of governments that do not.
As any competent macro-economist will tell you, the analogies are deeply flawed. Individual families and businesses do not have the capacity to manipulate interest rates and the money supply, but the government does. Individual families and businesses acting in ways that don’t correlate with the behavior of others do not cause contractionary cycles through the paradox of thrift when they save money. But drastic government reductions in spending in a recession can trigger that effect. Etc.
Nonetheless, with polls showing that most Americans don’t really understand the debt ceiling debate, it’s understandable that politicians would try to frame the issue in simple terms. I tend to think that the framing favors the Republican position right off the bat, because it cuts out the unique role that the government can play, but that fight is probably lost already, with very little appetite in DC for more stimulus.
Even accepting the framing, though, there’s an obvious piece missing. Consider the following line from Boehner’s remarks: “if you’re spending more money than you’re taking in, you need to spend less of it.” Well, yes, sometimes, but doesn’t it depend what you’re spending the money on? Suppose you’re spending more money than you’re taking in because you’re unemployed, and you need to spend some of your savings now to eat, pay rent, and look for a job. Wouldn’t you be better off continuing to spend on these necessities, even if to do so you need to borrow some money?
(Source: azspot)
