The Economy is Not Like a Household

[phantom power]

Bogus analogies between government budgets and family budgets make for easy demagoguery, since the idea that the economics would be the same seems superficially plausible, and most people only have experience with their own family budgeting issues. But it aint so.

I dashed off my Sargent comment in the few minutes before class, which meant that it was longer and more complicated than it should have been. So I want to come back to what I think is the most important point. In his speech, Sargent went right away to this:

2. Individuals and communities face trade-offs.

At one level this is, of course, true. But left there without further elaboration, it is deeply misleading — especially right now. For the essence of what’s happening now — the key to understanding the mess we’re in — is that sometimes the economy is not like a household, that our individual choices sometimes lead to outcomes that are in nobody’s interest.

In particular, when you have economy-wide deleveraging — when everyone is trying to spend less than his or her income, so as to pay down debt — you have a fundamental adding-up problem. My spending is your income, and your spending is my income, so if both of us try to spend less at the same time, what we end up achieving is mutual impoverishment.

...

... the reason we’re in the state we’re in is precisely the fact that the community doesn’t face the same kinds of tradeoffs that face individuals. Highlighting supposed words of wisdom that suggest the opposite is a big step backward.

http://krugman.blogs.nytimes.com/2014/04/21/the-economy-is-not-like-a-household

[Erich Bloodaxe BSN]

1. Let me print my own money

and take out interest free loans of millions and billions and my household economy will be like the rich people's economy!