The misguided family budget analogy

It’s one of the most common budget arguments in the discourse: if American families can live within their means without massive deficits, why can’t the federal government? It’s well-traveled ground, but I was nevertheless glad to see Jared Bernstein, at his new blog, explain why the refrain is misguided.

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 England).

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 under-invest. And that’s true for families and governments….

I’ve written about this more than a few times, and I’m glad to see Bernstein make the case so well.

When a family goes to buy a home, its members don’t simply write a check; they take out a mortgage. Almost no one can afford to simply and literally buy a home, so we take out very large loans, and make payments, with interest.

The same is true when a family wants a car, tackles college tuition, or thinks about starting a small business. American families, in other words, take on debts, some of them huge relative to their incomes, all the time. There’s nothing wrong with any of this — these are just routine examples of people investing in themselves, as they should.

The government’s debts aren’t identical — there is no mortgage or car payment, exactly — but officials take on debts to invest in things they consider worthwhile, too. A family that relies on student loans to pay for college should be able to relate to a government that relies on loans to pay for public services. The family thinks it’ll be worth living in the red for a while, so long as it can make the payments and afford the interest, because they’ll be better off in the long run — and the government believes the exact same thing.

The comparison between families and governments “living within their means” tends to annoy me because of the lack of parallels, but I’m wondering if I should just embrace it and turn it around. If Mr. and Ms. America take on debts they can afford to improve their position in life, why is it outrageous for their government to do the same thing? Forget macro- vs. micro-economics; shouldn’t this make intuitive sense to the American mainstream?

The answer from Republicans, I suspect, is that we can’t afford this much debt. (They weren’t thinking this way when they inherited a national debt that was $5 trillion and shrinking, and turned into a debt that was $10 trillion and growing, but let’s put that aside.) But we can afford it; that’s the point. Like a family making its monthly payments, the government is doing the same. Indeed, we’re doing so well on this front that others keep loaning us money at low interest rates, confident that we’re good for it.

It’s one of the most remarkable aspects of the debt-ceiling debate. A family faces a debt crisis when it runs out of money and has exhausted all options for borrowing money. The federal government hasn’t run out of money and has all kinds of borrowing options, but Republicans nevertheless want to create a debt crisis, on purpose.

It’s exactly why the GOP approach is nothing short of insane. If the country couldn’t find creditors and/or faced crippling interest rates, we’d be having a very different conversation. But we’ll be just fine, as soon as Congress takes a simple, procedural step — which Republicans don’t want to take for purely ideological reasons.