I came across an interesting paragraph in a business magazine. I'm not going to provide the link because it dives straight into partisan politics, and I've had to sanitize even this excerpt.
Instead I want to talk about economics. Until now I've happily accepted the analogy that a country's budget is like a family budget. Sure, intellectually I know that governments exist to prime the pump when an economy goes into recession, even if that means running a decade or two of deficits. I know that governments are supposed to insure (or legislate against) the risks that not even Berkshire Hathaway can afford to cover.
But I never questioned the governmental family-budget analogy until I read this:
Perhaps we shouldn't be making any analogies about economics. I'm just glad that "big data" is catching up to the theories and that computer processing power is finally able to put some research & analysis behind the debates.
I know that austerity during the Great Depression was not such a winner, and I know that we tested the concept again during the Great Recession. Better still, I'm happy to have a better analogy to use when I'm discussing the idea with my daughter...
Instead I want to talk about economics. Until now I've happily accepted the analogy that a country's budget is like a family budget. Sure, intellectually I know that governments exist to prime the pump when an economy goes into recession, even if that means running a decade or two of deficits. I know that governments are supposed to insure (or legislate against) the risks that not even Berkshire Hathaway can afford to cover.
But I never questioned the governmental family-budget analogy until I read this:
The engine analogy may also be flawed, but it appears to make more sense than a family budget. OTOH this concept bodes badly for EU austerity measures.Budgetary puritans ... view the world’s largest economy as an indebted family that needs to get back to basics. “The federal government needs to tighten its belt just like every hardworking American family has had to do during our economic recovery,” [said one Congressman].
The economy-as-family metaphor is familiar, emotionally intuitive—and incorrect. It’s a fallacy of composition: What’s true for the part is not necessarily true for the whole. While a single family can get its finances back on track by spending less than it earns, it’s impossible for everyone to do that simultaneously. When the plumber skips a haircut, the barber can’t afford to have his drains cleaned.
British economist John Maynard Keynes explained the futility of trying to shrink an economy into prosperity via thriftiness in his A Treatise on Money in 1930: “Mere abstinence is not enough by itself to build cities or drain fens,” Keynes wrote. “If Enterprise is afoot, wealth accumulates whatever may be happening to Thrift; and if Enterprise is asleep, wealth decays whatever Thrift may be doing. Thus, Thrift may be the handmaiden of Enterprise. But equally she may not. And, perhaps, even usually she is not.”
So let’s try a different metaphor. The economy is not a family but an engine that’s stuck in low gear. It doesn’t need a disciplinarian; it needs a mechanic.
The primary goal of government should be to get the economy running at full throttle once again. That will restore jobs and wealth and increase tax revenue, which narrows budget deficits.
Perhaps we shouldn't be making any analogies about economics. I'm just glad that "big data" is catching up to the theories and that computer processing power is finally able to put some research & analysis behind the debates.
I know that austerity during the Great Depression was not such a winner, and I know that we tested the concept again during the Great Recession. Better still, I'm happy to have a better analogy to use when I'm discussing the idea with my daughter...