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Brad @ Burning Man
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.

Comments

( 23 comments — Leave a comment )
gconnor
Jun. 3rd, 2012 05:22 am (UTC)
Agent Brad: I'd like to share a revelation that I've had during my time here. It came to me when I tried to classify your species and I realized that you're not actually "families". Every "family" on this planet instinctively develops a natural equilibrium with the surrounding environment but you, Congress, do not. You move to an area and you reduce incomes and reduce incomes until every available surplus is consumed and the only way you can survive is to spread to another area.

There is another organism on this planet that follows the same pattern. Do you know what it is? A virus. Congress is a disease, a cancer of this planet. You're a plague and we are the cure.
bradhicks
Jun. 3rd, 2012 05:44 am (UTC)
[citation needed]
Name even one natural species in any natural biome that prospers in "equilibrium," never having good years versus bad years, always the same every year.

Conservative economists are the only ones who see one bad year for tax collections and say, "Tax collections will always be this low, we have to cut spending," and who will then turn around the next time there is a good year for tax collections and say, "the government is taking in too much money, we have to cut taxes." You would almost think that they were making intellectually dishonest arguments because what they really want is no taxes and no government, period.

Except, of course, for above-mentioned expensive hobbies, like invading third-world countries. Hobbies that they cheerfully borrow money for, regardless of the debt limit or current interest rates. While claiming that we can't borrow money for anything actually productive, anything that would actually grow the economy, because of the national debt and interest rates.

Any family that budgeted its revenue and expenses like a conservative wants government to do (or at least like a conservative claims that he wants government to do) would be bankrupt and homeless in a matter of months.
gconnor
Jun. 3rd, 2012 06:14 am (UTC)
Re: [citation needed]
Sorry if that was overly cryptic, but yeah, I totally agree with you. (Original quote was from the Matrix, shamelessly stolen and bastardized.)

If the only tool you have is a hammer, a lot of problems look like nails. If the only tool you have is a giant pair of scissors, all your problems can be re-told in terms of something that needs cutting.

So, message to conservatives: Cutting budgets is a tactic, not a principle. (Just like the message to Obama last year was: Compromise is a tactic, not a principle)
thakur
Jun. 3rd, 2012 07:15 am (UTC)
what ever happened to 'living within your means' ?
bradhicks
Jun. 3rd, 2012 08:54 am (UTC)
If you temporarily have no "means," then "living within your means" equals giving up the things that make you long-term employable. Whether you're a lone worker, or a head of household, or a government. Credit is not evil, especially if you use it to increase future earnings. Again, whether you're a lone worker, or a head of household, or a government.

Watch your credit rating, whether you're a lone worker or a head of household or a government but seriously? Given that people all over the planet are lined up to loan the US government as much money as they're willing to borrow, at roughly negative 2.5% interest rate adjusted for inflation? You can't in any honest and informed way accuse them of ruining our credit rating.

(Further reading: Google "invisible bond vigilantes.")
Larry Hamelin
Jun. 4th, 2012 03:20 pm (UTC)
Also note that in a closed aggregate* economy, it's physically impossible to "live beyond your means;" to live beyond your means, you would have to build a time machine, travel forward in time, and return with goods produced in the future.

*All the members of an economy with a sovereign currency (such as the citizens of the United States) comprise a closed aggregate economy.
Larry Hamelin
Jun. 3rd, 2012 01:06 pm (UTC)
Money as electricity
The metaphor of government as an intermittent-income household isn't terrible, but it's not the best. I think a better metaphor is money as electricity (http://barefootbum.blogspot.com/2012/06/cyclical-or-counter-cyclical.html), with the government as the power plant and households as consumers of electricity.
Larry Hamelin
Jun. 3rd, 2012 01:08 pm (UTC)
Money as electricity (spammed)
Just FYI: presumably because it contained a link to my extended response, my previous comment was marked as spam.
bradhicks
Jun. 3rd, 2012 08:54 pm (UTC)
Re: Money as electricity (spammed)
If that happens again, just leave it in the spam filter; I'll de-spam it when I see it, usually only takes a couple of hours.

Edited to add: Ah, there it is. Blogspot's been real popular lately with linkspammers, LiveJournal's software is probably being paranoid about Blogspot lately.

Edited at 2012-06-03 08:57 pm (UTC)
westrider
Jun. 3rd, 2012 06:44 pm (UTC)
There's another flaw in the household analogy that I noticed recently: When a family spends money, it's just gone from their household. If they spent it wisely, they'll get something good for, it, but the money itself has been completely externalized.

When a Government spends money, on the other hand, a good chunk of that money usually stays within its Tax Base and circulates there, getting taxed again with every transaction.

The second part does, of course, fail to hold as true if the money is given to those who get massive tax breaks, take the money out of the Tax Base, or save/invest most of it instead of spending it. Who does that remind me of?
gconnor
Jun. 3rd, 2012 08:58 pm (UTC)
Excellent point. If government spending has a positive effect on the economy itself, that is an important consideration. I think economists agree it does have a positive impact... they just disagree about how much impact (but I don't think they disagree by much)
pentane
Jun. 4th, 2012 10:36 am (UTC)
Keynsian economists agree, but others point out the opportunity cost of the government taking money out of the economy to put it back in where their special interests have paid to have it put.
Larry Hamelin
Jun. 4th, 2012 03:14 pm (UTC)
It's worthwhile to be careful and precise: There's no opportunity cost at all for the government to create *money*. Since the government is part of the economy, it can't take anything at all out of the economy; it can take things only out of the private sector of the economy. And most Keynesian economists have taken Microeconomics 101 and understand opportunity costs.

There's an opportunity cost when the government uses money (which it can trivially create at will) to moving real *labor power* out of the private sector to the public sector. If the economy is not at full employment, however, the real opportunity cost of doing so is greatly reduced or eliminated.

Even when the economy is at full employment, the opportunity cost of moving labor power out of the private sector can be more than offset by the benefit of doing so.
gconnor
Jun. 3rd, 2012 09:00 pm (UTC)
Not all "debt" is bad -- if all debt is bad, why do so many students get student loans? Student loans are another example of going into debt with the totally reasonable expectation that it will be worth it in the future.
Larry Hamelin
Jun. 4th, 2012 03:15 pm (UTC)
All money is debt. If I hold a $100 bill, then the rest of society owes me $100 worth of goods and services, which I can demand nearly at will.
siege
Jun. 4th, 2012 03:46 pm (UTC)
No, you hold a promise that the rest of society honors, often unthinkingly. They can still refuse to sell you the goods you believe your bill is worth, as long as no legal contract has been made to solemnize the transfer.
Larry Hamelin
Jun. 4th, 2012 04:27 pm (UTC)
Siege, you are making a distinction without a difference. A debt is a promise. If I hold a $100 bill, I have rational and realistic expectations about what specific real goods and services I can demand at will, at least in the short term.

Indeed, a specifically monetary debt has real meaning only to the extent that you rationally and realistically expect what specific real goods and services the money you will receive in the future will obtain on demand. Otherwise, you're just lending and receiving otherwise meaningless engraved portraits of dead white men.

Edited at 2012-06-04 04:28 pm (UTC)
siege
Jun. 4th, 2012 04:44 pm (UTC)
An empty aquifer or an underfed child are in debt, but no promise was made. They have need, and go unfilled. A debt is a deficit.

A social debt may be held as a promise, and that can extend to money transferred through social connections and social obligations. A purely monetary debt is as much made of force as the demands you're saying you can make when you wave $100 around.

But ultimately, it's not your promise or your debt that is embodied by that money; it's a promise or debt created by someone else on your behalf. And while most people will act on that promise, your money may still be refused by some individuals. The government increasing the money supply in a closed economic system only creates debt if it insists that that money has the same value as it did before being printed. Otherwise the market values the money at lesser rates. The only difference is that in a real economy, information travels in waves, so there's a modicum of flex time before the newly-printed money becomes devalued.
Larry Hamelin
Jun. 5th, 2012 11:30 am (UTC)
"An empty aquifer or an underfed child are in debt..."

You are using a definition of "debt" that I think differs from that of most people, not to mention most economists. And I don't think you're using the definition consistently in your post. For example, you say, "The government increasing the money supply in a closed economic system only creates debt if it insists that that money has the same value as it did before being printed." How can the creation of money create any unfulfilled need?

Most people, and most economists, are going to look at a debt as an as-yet unfulfilled promise, and promises can be be individually constructed, or they can be socially constructed.

Correct me if I'm wrong, but I'm sensing something of a Libertarian perspective in your comments. If you don't want to recognize or legitimatize certain kinds of social constructions, well, you don't. But enough people do choose to recognize them, and they have real social effect.

Keep in mind that there are two levels of effects here. At the concrete level, the amount (and other contingent abstract properties) of money definitely has real effects: one can indeed have "too much" or "too little" money. At a more abstract level, though, unlike a household, the government cannot even in principle "run out" of money: if there were in reality too little money in an economy, there is no real, concrete obstacle to the government creating more. In an analogous sense, if your essay is too short, you have to come up with more of something "real" to say, but there is no shortage of the words themselves preventing you from making your essay longer.

I'm grossly oversimplifying, of course. Managing the supply of money is a fairly complicated and subtle task. But it's important to distinguish between the real, external constraints on the one hand and abstract, self-imposed constraints on the other.
silveradept
Jun. 4th, 2012 01:22 am (UTC)
Here we thought that some of those people would understand how to run family finances...but then again, most of them are so rich, they're not subject to the business cycle, so they probably don't understand this basic tenet of how the rest of us live.
livejournal
Jun. 4th, 2012 06:03 am (UTC)
And now, back with more data than ever - 24 May-3 June 02012
User silveradept referenced to your post from And now, back with more data than ever - 24 May-3 June 02012 saying: [...] economy competitive when times become good again. (Or to spur the cycle into good things again.) [...]
kimchalister
Jun. 4th, 2012 07:18 am (UTC)
Isn't this sortof like the advice in the Bible? I think it's Genesis 41, where they say that the government should save in good years and spend in lean years.
Too bad all those right wing guys don't read the Bible....
paulshandy
Jun. 14th, 2012 05:53 am (UTC)
I like the way you remember Sunday school.
( 23 comments — Leave a comment )

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