You know what’s not like a household budget?

Posted: March 4, 2017 in government, New Zealand
Tags: , , , , ,

…a national budget.

It’s a frequent meme of right-wing economics1 that the reason we must cut costs for social services is because we must treat our national finances like our household finances, and Responsibly Pay Off our debts.

This is of course complete garbage. Not only is the specific analogy flawed, really, the only thing the two concepts even hold in common is that they’re both budgets.

Let’s try the metaphor in reverse to see how well it works. Say I treated my household’s budget like a national budget. I live with three other people, and none of us have joint finances. Firstly, if I could act like this were a national budget, I would be visiting the neighbours and using my good credit record to borrow a bunch of money, and there’d be nothing other than the pressure from my neighbours to compel me to ever pay it back, and not only that, if I borrowed enough cash from them, (a commonplace occurrence in national budgets) I would have a sort of perverse control over them where they could be bullied into doing things that are in my best interests even though they don’t want to, like say, letting me put some sort of experimental composting system in their backyard.

And of course, if my household budget were like a national budget, I would be under no compulsion to spend money on what it’s actually intended for- the US is most famous for this trick, robbing its social security fund to pay for deficit spending and then turning around to complain that the fund doesn’t have the cash it needs to actually pay people benefits they’ve earned, because they’ve stuffed the piggybank full of IOUs. That would be like me taking all the power money my flatmates pool with me and blowing it on smashed avocado toast or 26 lattes a day, and whatever else millenials are supposed to spend money on irresponsibly.

So, you’re beginning to see some of the holes, right?

The other interesting thing is that ironically, national debts are actually a lot more like the notion of a “gift economy” than they are like the notion of modern consumer debt that you’re chased down if you can’t pay back. In a gift economy, it’s difficult to truly quantify how much a favour is worth, because nobody uses currency. So you and your neighbours keep doing each other favours backwards and forwards, and often nobody’s sure of who’s ahead and behind, but suddenly everyone’s success is tied together and you’ve formed a community. In foreign relations, some deals work a lot like the gift economy. This isn’t exactly the case with sovereign debt, but there is the similar effect I described earlier, where a foreign nation who has bought up a lot of your debt can become a de-facto economic ally because they are dependent on your ability to service that debt. China currently has that type of relationship to the USA.

Now, is it important to pay off our debts? Yes and no. It’s important that internationally, everyone try to even out their budgets so they’re not heavily in debt and they’re not heavily in surplus, both of which create inefficiencies and inequalities in our increasingly interconnected financial system. (Keynes proposed a system to solve a problem similar to this with the balance of trade, called the International Clearing Union, and it’s kinda surprising the concept was never extended to national debt and sovereign wealth)

But it actually doesn’t precisely matter if we go into deficit or debt from time to time, so long as we have sound fiscal management that can get us out of debt from time to time, and no government gets us into so much debt that the interest payments become burdensome. In fact, completely counter-intuitively, it’s actually good for the economy during a recession for the government to be running a deficit, if it’s doing so to buy a lot of goods or services from its own economy, or to directly employ a lot of people who didn’t have jobs. Why? Because sometimes the economy slows down too much due to events in the private sector. During those times, the best thing the government can do is actually step in to employ people, to pay their expenses while they re-train, or to contract a lot of goods it might need later. These programs are very effecient during a recession, because the money is highly likely to be recirculated multiple times, heating the economy back up from a cold start.

In contrast, when the economy is already doing well, it makes a lot of sense to start being efficient with government spending, to cut back on programs that may be wasteful or no longer needed, and to reign in the stimulus to the economy of government spending, and to use that freed-up tax revenue to pay down debt, or even put a little sovereign wealth aside for a rainy day in the future. Why? Because often you can overheat the economy, causing it to sell goods or services that aren’t really needed, and to cause a huge over-correction when the realisation hits the market that all the economic activity was overvalued. (like the dotcom crash when people thought practically any website would be raking in money hand over fist… until actually they discovered they weren’t) By pulling on the reigns, the government can often prolong a period of growth, and save on a lot of inefficiencies in constantly expanding and closing businesses that is caused when the economy frequently goes into boom and into recession. There’s more to cover on this, but it belongs in the notes2.

Household budgets have no similar social incentive to go into debt or to make savings at any particular time based on market conditions. It’s all about what provides the most utility for the household. (ie. do we invest in a car so we can move items and people around more efficiently, or do we save that money to maybe afford a property for our grandkids assuming we can save at more than the inflation rate of house prices?)

Like people who complain about things being a “slap in the face” deserve at least one face-slap to provide comparative context of why their statement is wrong, people who claim a national budget is like a household budget should really try to modulate the speed of the economy by going into debt during a recession and see how that bloody works out for them.

1 Which, coincidentally, is terrible about not paying off the national debt. Seriously, look up the statistics, National governments suck at managing government finances, they blow out the national debt and don’t get anything for it, and make Labour pay it back while offering better government services. National’s entire reputation as “sound economic managers” is completely unearned propaganda from over-suited business-people who simply like their policies better.

In fact, I suspect it’s become something of a game among right-wing finance ministers to see how much debt they can leave to the next government while still being taken seriously. Obviously the answer should be that you should never take a National Minister of Finance seriously, it’s the equivilent of having a Green Minister for Racing.

2 In fact, on this subject of counter-cyclical economics, everyone who follows politics should know that it’s the sign of an incompetent government when it frequently runs deficits during an economic boom, or is aiming for surplus during a recession. Hmmm, which finance minister does that sound like? Oh yeah, the current prime minister, who was only rescued from worsening our recession catastrophically by a gigantic stimulus poured into Christchurch from the National Disaster Fund to repair all that earthquake damage. Didn’t feel like a stimulus to you Christchurch? Fair enough, but to the overall economy, it was. It’s all that stopped Bill English from being New Zealand’s own Herbert Hoover. It takes a special sort of skill to take a recession and turn it into a depression, and only dumb luck prevented that from being John Key’s government.


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