Comparing Government to Household is ‘Fallacy’

By | July 8, 2011

July 8 (Source: By Grand Forks Herald, N.D.) - “Every family has to balance their budget,” Chris Chocola writes on today’s editorial page in support of a balanced-budget amendment.Counters Helen Popper, “Well, that’s not exactly right. … We (families) borrow money once in a while.”

But both writers are ignoring a fundamental point, one that must be understood before any argument on a balanced-budget amendment can progress.

The point is this: The federal government is not a household.

And that being the case, it’s wrong to use kitchen-table budgeting for real guidance on what the federal government should do.

This observation is widely accepted in economics, even though economists themselves (such as Popper) use household comparisons now and then. Here’s the argument from a standard Econ 101 textbook, edited for space.

The text is “Economics: Principles and Policy” by William Baumol and Alan Blinder.

“Bogus arguments about the burden of the debt:

–It will ruin the nation when we have to pay the enormous debt back.

“Unlike a private family, the nation need never pay off its debt. Instead, each time the principal is due, the U.S. Treasury can simply ‘roll it over’ by floating more debt. Indeed, this is precisely what the Treasury does.

“Is this a bit of chicanery? How can the U.S. government get away with making loans that it never intends to pay back?

“The answer is found by recognizing the fallacy of comparing the U.S. government to a family or individual. People cannot be extended credit in perpetuity because they will not live that long. Sensible lenders will not extend long-term credit to very old people because their heirs cannot be forced to pay up.

“But the U.S. government will never ‘die’; at least, we hope not! So this factor does not arise.

–It will bankrupt the nation.

“This is another example of a false analogy. What is claimed about private debtors is certainly true. But the U.S. government need never fear defaulting on its debt. Why?

“First, because it has enormous power to raise revenues by taxation. If you had such power, you would never have to fear bankruptcy either.

“But there is still a more fundamental point — one that distinguishes the U.S. debt from that of many foreign nations.

“The American debt is an obligation to pay U.S. dollars. But the U.S. government is the source of these dollars; it prints them up!

“No nation need ever fear defaulting on debts that call for repayment in its own currency. At the very worst, it can always print whatever money it needs to pay off its creditors.”

Please note the textbook’s very next line, which the writers go on to explain in detail: “It does not follow, however, that acquiring debt through budget deficits is therefore always a good idea.”

The above quotes are not arguments for deficits and against balanced budgets. They’re meant only to show that the U.S. government is completely different from a household, starting with the government’s basic ability to tax and to print money. And that means it’s often misleading to use household comparisons as easy policy guides.

– Tom Dennis for the Herald

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Copyright (c) 2011, Grand Forks Herald, N.D.

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A service of YellowBrix, Inc. Publication date: 2011-07-08

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