The Household Analogy works just fine for Goverment

From Larry Elliott:

Top of the list is the idea that the UK government is no different from a household. That means it should match its spending to its income as closely as possible, borrowing prudently and within tightly defined limits. Otherwise it will “max out the nation’s credit card” and risk spiralling into unsustainable debt.

This analogy has the benefit of sounding like a statement of the obvious to many voters, but is actually entirely false. There is no such thing as the nation’s credit card, and a country that prints its own currency can never “max out” or face bankruptcy in the way an individual can.

This is not true, the Household Analogy works just fine for Government.

Of course, an analogy is just that, an analogy. It’s not supposed to map detail for detail across reality. It’s a “this is like a this” not a “This is a this”.

The sense in which it does work is that a household can indeed promise all sorts of things. The more promises made the less the rational observer values each promise. This is why as debt levels rise - taking on a debt is a promise of repayment - the price of each debt in interest rises. Because the promise to repay is devalued by the number of such promises that have been made.

Sure, sure, a government is not exactly the same as a household. The limitation to promises to repay is not the income of the household it’s the income - or that portion of it that can be abstracted by government - of the country as a whole. We can even imagine government insisting that people not be allowed to leave and thus held hostage to repay such debts - it has happened, in fact we’ve seen recent proposals for a Reichsfluchsteuer. There are differences, yes. But the same end result happens. The more promises of repayment made by government the less each promise is valued at. This starts with the value of the bonds issued. But eventually it becomes that promise of usefulness encapsulated in the value of the currency itself. Make too many of such promises and the value of each promise declines.

This even happens to governments that supply their own currency. Sure, they can keep printing the money to repay the debts but the money itself becomes worth less and eventually worthless. The pound sterling has lost some 98% of its value since 1945. As an example.

Governments are not households, no. But in certain senses the limitations on what they may do are analagous. One of them being that the value of any promise they make depends upon other peoples’ valuations of how many promises they’ve made - more means less. The Household Analogy works for Governments.

Tim Worstall