In the whole argument about austerity versus stimulus, fear of unemployment versus fear of national debt, fear of printing money and inflation versus fear of stagnation and deflation, even the best professional economists are having a hard time explaining what's wrong with the right-wing talking point, "Government should manage their finances like a family! When times are tight, you tighten your belt!"
I've thought about this for a long time, and I think I can explain it a little better, because the analogy actually does work ... for certain kinds of families. Specifically, it works for families that may not be like yours. You do know that not everybody is salaried, right? There are even families that don't work for hourly wages, per se. There are families that have cyclical income. Whether you're rich or poor, you probably actually know at least one family like this. High end realtors earn little or nothing between big sales. Authors make little or nothing between widely-scattered book advances. Contractors only get paid when they land a contract. Farmers only get paid at harvest times, and the less diversified the farm, the longer they go between (hopefully large) paydays, and itinerant farm labor also only get paid their much lower salaries at the same harvest times. Seasonal retail workers make next to nothing between big holiday sales periods, whether they own the retail shop or just work in one, and for that matter, most family-owned businesses will tell you that income varies widely from month to month.
Whether those families are rich or they're poor or they're in between, what they all have in common is income that is hard to predict. It's cyclical: whether it's regular, or irregular (predictable or unpredictable), it follows a pattern of good months followed by bad months followed, somewhat predictably, by more good months (and after that, just as predictably, more bad months, ad infinitum). And so they have to plan, and spend, accordingly.
Because of something called the business cycle, the boom and bust pattern that no government or economy has ever completely eradicated, government tax collections follow the same pattern as those families. And if I can get you to think about a government budget the way a family with cyclical income has to think about their budget issues, then you'll be that much closer to understanding the argument between "freshwater" (Republican and right-wing Democrat) pro-cyclical and "saltwater" (liberal) counter-cyclical economics.
Pro-Cyclical Family Budgeting
Imagine you're a farmer or a writer or a contractor or a realtor and you just got a big payday, way bigger than last month. Now that your income has risen to that level, you can predict with confidence (as long as you ignore any pesky complaints from people who insist that there are things called "fundamentals") that this reflects a change in your basic situation. Obviously you have become much smarter, you are managing much more intelligently, you have become much more productive than in those months that didn't have a harvest or a contract.
Therefore you can do two very important things. First of all, you quit any other jobs that you're working. If your spouse has a job, they should quit it. It's inefficient. It's wasteful. Secondly, now that you have this new permanent higher income, you should adjust your spending accordingly. This is a good time to go out and invest in expensive hobbies that you've never been able to afford before. In particular, now that you're going to be earning this much money every month from now on, you need to move to a well-guarded gated community, one that hires lots of guards. Buy a lot more guns, too.
Oh, wait, that was a one-time windfall, and it will be some unpredictable number of months before you get another one? Well, the most important thing is not to give up your space in that huge house in that well-guarded gated community, or to give up your guns, because you'll need them some day. The most important thing to do is to cut spending. And since you're not working right now, that means sell your tools. You don't need to drive to work right now, so sell the car. You don't need your work clothes, either. Liquidate everything. And don't take any additional professional development classes, because you can't afford that. Times are tight; you need to adjust spending accordingly. If anybody peskily asks you how you're going to get more income without your tractor or your seed corn or your tools or your typewriter or your car or your business clothes or up-to-date professional qualifications, well, comfort yourself that you still live in a gated community and still own lots of guns; you can make them go away. And what do they know? After all, sooner or later someone will notice how thrifty and smart you are for having liquidated all of your working tools, and will invest in you.
Counter-Cyclical Family Budgeting
Now, instead, imagine that you're a farmer or a writer or a contractor and you just got a big payday, way bigger than last month. You know that after this month, or at most after a couple of months, the income is going to go back down, so the most important thing you can do is to watch your spending like a hawk. Don't use that as an excuse to cut other side-income, don't use that as an excuse to invest in luxuries. If you can put that money somewhere where you know for a fact that it'll increase your productive income later, ideally in some way that won't increase your spending during the lean months, like investing in additional training or education or in durable goods, this is really the time to do it. It's probably not a bad idea to be charitable to people less well off, too, so that people will think well of you when your income is down, but don't go overboard. Most importantly, set as much of that money aside for the lean months as you can. If you're getting an exceptionally large income and you're not setting money aside, you know that you're doing something wrong!
The next month, or after a couple of months, it's not harvest time or you haven't had a contract lately and income is down. But the good news is that you didn't spend the previous months borrowing madly. And because you didn't give up your other sources of income, you still have some money coming in. You should even have some savings. But even if the lean months last longer than the savings does, you also have productive equipment to borrow against, judiciously, and because you didn't go overboard during the good months, you have excellent credit. You'd still rather not borrow money, but you can rest assured that if you do so while your credit is good and your interest rate is low, and if you kept yourself employable during the good months and you don't sell off your tools now, you can pay it down during the good months.
Governments SHOULD Manage Their Finances Like a Smart Family: Counter-Cyclically
I don't know how many of you remember the 1995 US government shut-down? In the 1994 midterm elections of Bill Clinton's first term, the Republican Party was swept into Congress in huge numbers, and pro-cyclical economic genius Newt Gingrich became Speaker of the House, the leader of the side of Congress where all budget bills have to originate. At the time, the business cycle was roaring, in the early (and least fraudulent) stages of what came to be known as the Dot-Com Bubble. The Congressional Budget Office had predicted deficits as far as the eye could see, but actual government income rose precipitously. Analysis at the time showed that expenses were exactly as had been predicted, and income was exactly as had been predicted, except for one category. Because there was so much churn in Internet stocks, the government was taking in a huge amount of money in short-term capital gains, way more than was predicted. And so Newt Gingrich marshaled the Republicans to refuse to pass any budget unless it sharply slashed taxes. President Clinton, who was, on every other economic issue except pro-cyclical versus counter-cyclical economics, a moderate Republican, insisted instead on modest cuts to government spending, and on using the money from those cuts and the short-term capital gains tax windfall to pay down the national debt.
Clinton won, and the US made the first (and last) national debt principal payments since the Vietnam War. Republicans predicted that government would explode, that liberty would erode, that investors would stop investing because they were over-taxed; none of these things happened. At least, not until it turned out that most of the actual revenue in the Dot-Com bubble was from spending to fix the Y2K bug, spending collapsed early in the Bush the Younger administration, and capital gains tax revenues went back to what the CBO had originally predicted them to be. In other words, contrary to Gingrich's prediction (and Wired magazine's, and all of the Dot-Com fraudsters'), the "Long Boom" was, in fact, an ordinary (if large) business cycle bubble, and thank all holy gods we didn't slash taxes at the time or we'd have been even more screwed when we went back to normal levels of revenue or worse.
Because worse came. The American people elected a President who agreed with the Republican party (and with right-wing Democrats) that we needed pro-cyclical economic policies. Government revenue was down, so Bush threw away much of the income the government was still drawing by passing huge tax cuts. He also chose that time to bulk up our gun collection (huge private security contracts) and to invest in expensive luxuries we couldn't afford, like the Iraq War, while slashing investment in education and slashing the budget for repairs to the things that make us productive, from roads to ports. Unsurprisingly, as our tools and our skills got farther and farther out of date, nobody hired us.
Look. You want what the Internet calls the tl;dr ("Too Long, Didn't Read") version of this? Government should manage its finances like a farm family. And there's a farmers' saying that describes austerity politics, an old saying, one that probably goes back at least as far as the bronze age: "eating your seed corn." When the business cycle is roaring, government should be slashing spending and paying down debt and raising taxes, just like during rich months and rich years farmers know to cut their spending, pay down debt, set aside money for later, and keep looking for more income opportunities. When the business cycle contracts, governments should be borrowing all that cheap money that's out there to upgrade our tools and our skills, so that we can be competitive when the economy recovers, just like a smart farmer who kept his credit rating intact during the good months specifically so he could borrow rather than eat his seed corn.
Republican and right-wing Democrat "freshwater economics" austerians want the government to manage its finances like a family, all right. Like an exceptionally stupid family.