The personal-finance metaphor

By Felix Salmon
July 21, 2011
Paul Krugman has been railing against what he calls "the false government-family equivalence" for a while: what's true at the family level -- if your income goes down, for instance, you need to spend less money -- is not necessarily true at the government level.

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Paul Krugman has been railing against what he calls “the false government-family equivalence” for a while: what’s true at the family level — if your income goes down, for instance, you need to spend less money — is not necessarily true at the government level.

But the metaphor is back, in a new form. And this time it’s coming from the left. Here’s Larry Summers:

The idea that adults who have some agenda, whatever the merits of their agenda, are really prepared to threaten sending the United States into default, to pursue their agenda, is beyond belief.

You know, I have had arguments with my college-aged children about spending, and sometimes we discuss whether they should spend less, whether they should pay, whether I should pay. We don’t entertain the option that because we can’t resolve our argument, Visa should get stiffed.

Nemo has extended the metaphor to full-on allegory length, talking about a woman who orders a $40 pizza when she only has $20 to spend. And Michael Kinsley has a whole column driving home the equivalencies:

What does Michele Bachmann teach all those kids about the importance of living up to your obligations?

Say, for example, that one of them owed some people, oh, about $14.3 trillion dollars. Would Bachmann tell her children that a debt is a moral obligation that an honorable person will go to great lengths to pay if at all possible? Or would she tell them, Well, it all depends. Whether you pay back money that’s been loaned to you is a practical question. And if you calculate that you’d be better off reneging, then by all means do so. It’s perfectly O.K.

Does Bachmann teach her kids that it doesn’t matter why you owe the money or what you spent it on—that if you owe it, you have a duty to repay it? Or does she tell them that your obligation to repay depends on whether—in your own opinion—you spent the money wisely or wasted it? Does she say it’s a matter of principle, or does she say it’s a matter of what you can get away with?

It’s all well and good to say that the government is like a household and should always honor its debts. But households don’t always honor their debts — this is why very few people have perfect credit ratings — and if they’re a few days or weeks late on a payment, the world doesn’t come to some calamitous end. So as an argument, this is not a very strong one.

And tactically, wheeling out the household-finance metaphor plays right into the hands of those who, like Barack Obama, are prone to talking about how “government has to start living within its means, just like families do.”

I’m beginning to think that the most politically corrosive movie of the past 20 years was Ivan Reitman’s Dave, from 1993, where the president, armed with nothing but his neighborhood accountant and a couple of bratwursts, manages to fix the budget over dinner.

It’s an attractive and romantic notion, which is why it plays so well in congressional races; it’s almost an article of faith, at this point, among Tea Party types. All we need is some common sense, and the problem’s solved. And that’s also why the personal-finance metaphor is so toxic and dangerous. I can see why people reach for it, at times like these. But they should maybe think twice before doing so.


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I think that when discussing the behavior of borrowers, you also have to discuss the behavior of lenders. One of the reasons why more and more people think that it is morally acceptable to walk away from credit card debts and underwater mortgages is because the banks and credit card companies have treated them like crap.

But ask those same people if they would stiff a friend or family member and you would get a very different answer. Not all lenders are created equal.

Posted by mfw13 | Report as abusive

It’s a poor message, and a bad analogy anyway, this idea that, as individuals and businesses live within our means — it’s hardly true. We borrow to send kids to universities; we borrow money to go back to school in cases of structural employment-caused displacement; we borrow money to build every commercial office building; we borrow to start up small businesses.

There are many instances when individuals and businesses live beyond their means, and for a very long time, when such borrowing increases our abilities or chances of pushing ourselves up into a higher income bracket or securing a better future for ourselves and for others.

When Conservatives repeat as dogma, of living within one’s means, it only rings true for extraneous expenses that one could do without, because they add little value to our present and future. As they talk about cutting Medicare and Social Security, for instance, it rings insincere, because these programs add enormous value to our elderly brethren, who typically do not lead lives of luxury, but of miserly means.

Posted by GRRR | Report as abusive

But drill too deeply and — of course — *all* metaphors fall apart. They nevertheless can be useful, as this one is in stating the very simple fact that neither families nor governments can sustain living on credit for the sake of fueling consumption. In this case, it’s a matter of scale.

Posted by aquacalc | Report as abusive

As far as debts go it would be much easier for the government and private borrowers to repay their debts if the inflation rate went back to the average of the 80s or 90s and the lenders were forced to pay the difference between that and current inflation expectations.

Posted by tuckerm | Report as abusive

Agnotology: Culturally constructed ignorance, purposefully created by special interest groups working hard to create confusion and suppress the truth.

Posted by JimInPanama | Report as abusive

@aquacalc: But that’s not true, either. Private households are cash constrained. They can’t spend past their future income, and being people, they have real limits on their wages and the horizon they have to earn income.

This doesn’t describe a nation at all. It elides more that it illuminates. A nation’s only constraint is it’s production. If the debt it assumes, after interest payments, has a positive return in GDP-growth, then yes, it can finance itself in perpetuity. It can even do so in ever rising amounts – nominal values are tricky things.

That’s not to say that government isn’t “limited”. But it’s just not limited in the same way households are limited. It’s limited by interest rates, by the crowding out of private spending in a full-employment scenario, by political stability, and by the trend rate of future growth. Those are real problems. But they are most emphatically NOT problems faced by households.

So, yeah, you can say that the metaphor works because both households and governments have limits on their debt. But beyond that, the metaphor is so unworkable that, more than being simple useless, it’s actively misleading.

Posted by strawman | Report as abusive

Correct @aquacalc, “the metaphor is so unworkable that, more than being simple useless, it’s actively misleading.”

Agnotology: Culturally constructed ignorance, purposefully created by special interest groups working hard to create confusion and suppress the truth.

Posted by JimInPanama | Report as abusive

@strawman, that was a good explanation. Are exchange rates another consideration? I remember (a decade ago?) when the Euro was at parity or even below the value of the dollar. Today we seem to accept a range of 1.3:1 or 1.4:1 as an appropriate USD:Euro ratio. That seems to indicate to this feeble mind that we’ve grown poorer relative to the EU (especially assuming that our incomes haven’t kept pace).

I believe that Felix had noted in a post a few weeks ago that we really don’t notice that unless we travel overseas, and perhaps also with the price of oil. But is that also in some way a function of increased spending and debt?

Posted by Curmudgeon | Report as abusive

aquacalc, right on.

Felix,the only reason why the economy didn’t fail yet was the big and markets banks were being propped up atificailly. Dropping more money into Corporations who are hoarding and not hiring is “doing something” but not the right thing. They will hoard and not hire as they have been doing.

The only way a Government should be “giving away” money is to those companies who are expanding and hiring only in America and green companies who show innovation.

Why are too big to fail banks still growing and still having roosigners sign their fraudulent documents? Why are banks allowed to shape financial regulations through lobbying for less regulation, when in reality Glass-Steagall needs to be put back in place? Because failure is rewarded… taxpayers lose.

Why are the AGs and the SEC not on the banks and servicers for ripping off homeowners, HAMP, the IRS and investors? Why are they being given immunity even in the face of continued fraudulence? Because failure is rewarded… taxpayers lose.

Why are the fake wars still continuing? Why is oil still a problem after 1970 and why aren’t there viable fuel alternatives yet? Because failure is rewarded… taxpayers lose.

Why are their loopholes in taxes like GE getting money back while not paying taxes, hiring overseas, and Jeffrey Immelt, the chief executive of General Electric, becoming head of the jobs council when his idea of jobs is to get them as cheaply and efficiently and to pay for as few as possible? Because failure is rewarded. Taxpayers lose.

The debt levels are unsustainable, and the artificial propping from the fed is barely holding up the house of cards.

Perhaps the Government and a household are very similar. They don’t spend within their limits, they spend any surplus, they spend too much on the frivolous rather than the practical and tighten in the wrong order as well, they have no idea how to budget, they are both spending the taxpayers money (nut at least the taxpayer is sopending his own money unwisely) everything is a financial crisis as they are too much in debt and lastly, do often do not fix the problems that made their debt crisis. (see a little of that long list above)

Posted by hsvkitty | Report as abusive

Uh, if governments should be run like households, doesn’t that mean that they should (as households do) take advantage of their Lines of Credit when needed?

When I run out of space on a credit line, I ask for more. If the market is willing to give it to me, I use it until I can pay some of it back. This allows things such as car purchases, mortgages, education expenses, and medical bills to be paid.


Posted by klhoughton | Report as abusive

to be fair, i think that charles grodin could figure this thing out pretty quickly.

Posted by rmbjspd | Report as abusive

Hmm. Bottom line this. Which is worse? 1/ eskewing liquidity and needlessly driving down a credit rating (or perception of default) or 2/ not fixing longer term spending. I say option 1 is much worse because it can impact the structure of spending that needs to be affected in 2. Anyway, in the battle of which-terrible-analogy-is-less-bad I think the analalgy of not paying immediate debts wins.

Posted by chappy8 | Report as abusive

Look– the reality is that with politicians like Bachmann representing one of the two major parties, treasury securities really aren’t all that risk-free. There’s a price to be paid for lunacy, and the market, as ever, will determine what that price is.

Posted by MattF | Report as abusive

That’s what Italy believed until a few weeks ago. Markets are funny things, one day they can wake up and decide that your borrowing isn’t going to provide positive GDP growth any more, and then you are faced with the choice between truly ugly austerity or radical devaluation and all the ills that come with it. Some of us don’t want to play in the minefield, we’d rather stop when we get to the fence. You guys think you know better. 800 years of history says you don’t. Go read This Time is Different.

Posted by Equityval | Report as abusive

Well of course, klhoughton, but it is only sustainable until it isn’t. Maybe the Government should be more transparent and not lie and pretend that the recession is over when nothing has been done about the cause of it or the debt incurred by it.

It is not like the typical middle income earner and the jobless are not aware that the recession is NOT over for them. Trying to live indefinitely on credit and spending with no constraints or budget, with no income coming in, is not good for a homeowner or a government.

Posted by hsvkitty | Report as abusive


As I said, “That’s not to say that government isn’t “limited”. But it’s just not limited in the same way households are limited.” I did not say, “Governments can borrow whatever they want, at whatever rates they want, in perpetuity” which seems to be the point your arguing against.

Yes, Italy is in a bad spot, but the situation isn’t really comparable – the Italian debt-to-GDP ratio is pegging 120%. Sure, they’re running a primary surplus, but when you have debt at that scale you’re always going to be pretty vunerable to interest rate swings. More so when you don’t control your own currency.

But beside that, yes. Italy is an example of a nation that struggles with its debt burden. I’m not quite sure how this relates to my original point, which is that even the simplest comparisons between households and governments still result in false metaphors.

Posted by strawman | Report as abusive

@Curmudgeon – I might not be reading your question right, so apologies if this is off the mark. But to a first approximation, no. American debt is dollar-denominated, so the debt burden isn’t affected by exchange rate fluctuations.

Posted by strawman | Report as abusive