Abstract
The Government Is Not a Household: A Long-Term Perspective on a Bad Metaphor
Charles Bartlett
In a conversation with Bloomberg’s David Westin at the most recent World Economic Forum in Davos, Switzerland, Lawrence Summers used a straight-forward analogy. In describing the debate over whether to raise the debt ceiling, Summers said that he and his family have discussions about the payment of their bills—perhaps he will pay the credit card bill, perhaps his children will—but “the idea that the family should stiff Visa because we can’t agree is absurd.”
The relevance to the debt-ceiling debate is clear enough: the notion that, absent agreement over which groups within the country should pay, the United States ought to default on the obligations it has already incurred is extremely misguided and would have severe consequences for future borrowing and much else. Such would be the result of a failure to raise the debt ceiling.
Summers’ analogy is quite useful as a characterization of this debate and I do not wish to quarrel with it. He is, however, not alone in invoking the image of a household and its finances as a familiar lens through which complex economic issues might be clarified.
This iteration of the debt-ceiling debate seems all but certain to continue right up to the brink, and it will probably be superseded by the next round relatively soon thereafter. After the US reached its $31.381-trillion borrowing limit on January 19, the Treasury Department began using “extraordinary measures” that, it says, will allow the country to avoid default until June 1.
In the run-up to that date and likely after it, we will almost certainly hear another metaphorical likening of the government to a household. This metaphor, which has been trotted out frequently in past decades, purports to elucidate the accumulation of government debt, the operations of government spending, or the processes behind policy formulation over time. In contrast to analogies like the one offered by Summers—which focus on an accounting or budgetary reality at a specific moment and may be useful—this metaphor fundamentally obfuscates the economic circumstances it claims to simplify. What is worse is that economic thinkers have recognized as much for centuries.
The metaphor invokes an indebted household that ought to curtail its spending to avoid accumulating more debt and to pay down over time the bills that have piled up. In many instances, those employing the metaphor gesture toward the improved position in which the household would find itself as a result of its responsible decision-making.
We do not have to wonder at the supposed lesson for a state and its finances: just as the putative household would be better off with a bit of belt-tightening (to mix metaphors only slightly), so too a government in such a position should reduce spending to pay down the national debt. Calls that a government “get its fiscal house in order” are a variation of this metaphor, and lamentations about leaving debt to “our children and grandchildren” accord with it as well (on this intergenerational anxiety, see Melinda Cooper, “A burden on future generations? How we learned to hate deficits and blame the baby boomers.” The Sociological Review 69, 4 (2021): 743-758).
An implication of this imagery is that no particular expertise is needed to determine proper fiscal policy: managing a household’s finances may not be easy but many people can do it, so why should we think there is more to managing a government’s budget? The fact that “economy” derives from the title of an ancient Greek text describing the “law” or “custom” (nomos) relevant to a “household” (oikos) might cloud matters further. Although a similarly entitled text once thought to be by Aristotle begins with a refutation of this connection between household and government management, this erroneous equation lives on into contemporary commentary for several reasons, not least our societal lodestars of homeownership and the nuclear family, as well as economists’ love of analogy.
In recent years, this metaphor has often been used by those advocating forms of austerity that are supposedly necessitated by previous bouts of over-spending. Paul Krugman made this point in a New York Times Opinion piece entitled “Nobody Understands Debt” (February 9, 2015), where he explored common misconceptions about the significance of debt, the relation of borrowing by individual households and firms to aggregate debt, and the effectiveness of austerity. He also noted that usage of the household metaphor is not confined to the United States. While she was Chancellor of Germany, Angela Merkel was fond of calling to mind the Swabian housewife, a paragon of thriftiness in the collective German imagination, in order to insists that Europe not try to live beyond its means. (Julia Kollewe (“Angela Merkel’s austerity postergirl: the thrift Swabian housewife,” The Guardian September 17, 2012) has connected this careful household management with the poverty experienced by the region throughout much of the 19th century, as well as the imprint on the German psyche of the infamous Weimar hyperinflation that peaked in 1923.)
Deeper consideration, however, exposes the metaphor as misleading. To highlight but two of the crucial differences between the indebtedness of a household and that of a government, we can look to who owns the national debt and to the uniqueness of the government as economic actor in any national economy.
First, most of the US national debt is owned by Americans—according to the latest Treasury Bulletin, which includes data through December 2022, foreign and international investors held $7.3 trillion of the debt—whereas a household does not owe what it has borrowed to its own members. Given that Americans holding US government debt do so through an array of different means and to differing ends, and that this holding often accentuates professional and other national demographic rifts, an assertion that “we owe this segment of the debt to ourselves” would deserve elaboration. Any such elaboration, however, finds no parallel in the case of a hypothetical household. Recognizing the sub-category of intergovernmental debt—the amount of money owed by the Treasury to other agencies of the federal government, which stood at more than $6.89 trillion in January 2023—casts yet more doubt on the metaphor.
The unique position of government as economic actor can be demonstrated in many ways. Indeed, economists and scholars of public policy have repeatedly done this, even with the express purpose of highlighting the misleading metaphor of interest to us: among others, see Lucy Barnes and Timothy Hicks, “Are Policy Analogies Persuasive? The Household Budget Analogy and Public Support for Austerity.” British Journal of Policy Studies 52 (2022): 1296-1314. Demonstrations of the flaws of this comparison have focused on the ability of governments to enlarge their budgets through increased taxation, the fact that governments can print money, and the notion that governments make decisions over much longer planning horizons. The simple statement here of these capacities or considerations is not meant to deny the political rancor that can attend their exercise, but rather to stress the differences between a government’s abilities and attributes and those of a household.
So far, this piece has highlighted a recent and useful analogy, and has contrasted that analogy with a metaphor’s more common, unhelpful forms. As noted, we do not want for demonstrations of the misleading nature of this metaphor by economists and other experts in contemporary policy, although some of these explanations, such as those deriving from Modern Monetary Theory (MMT), are less convincing than others.
Our primary interest, however, is to show that political economists and other observers of politics have for centuries recognized fundamental differences between household and government finances and have cautioned against likening the management and indebtedness of one to that of the other. While it will necessarily have to elide many of the details of the predominating economic and intellectual circumstances at the times in which these observers wrote, the remainder of this piece will suggest the depth of the realization that governments and households are fundamentally different in terms of their administration and debt. The explanations of the following individuals buttress one another by illuminating the disparate time horizons relevant to government and household debt, the heightened social importance attributed to government credit (as reflected in legislation and in other ways), and the variations in expertise needed to lead the differing constituencies.
In 1929, John Maynard Keynes and Hubert Henderson argued that a “gathering momentum” would result from the deficit spending proposed in that year by David Lloyd George; this momentum would lead the income generated by government action to exceed the original expenditure, as subsequent consumption would ensue once the money was in peoples’ hands. In The Means to Prosperity (1933) Keynes further described this “multiplier effect,” asserting that the issuance of government debt could spur investment in the private sector greater than the amount of the original debt, especially in conditions of significant unemployment, and thereby bring about a net increase in national income.
The ideas that investment was not entirely dependent upon savings, and that government expenditure did not necessarily operate in a zero-sum manner—where funds spent in pursuit of one initiative signified that less was available for other goals—were a new way of looking at government borrowing. They required a break with the prevailing “private housekeeping,” as Keynes called it, notion of the budget: since the state was not bound by any generational limit as it incurred and retired its obligations, it was nonsensical to use household borrowing as the frame by which to understand public debt, as Keynes argued in “Democracy and Efficiency” in early 1939.
Keynes emphasized that governments and households differed, among other reasons, because the former do not face generational constraints on their borrowing. Adam Smith had already demonstrated that even within one generation, governmental and household debt should not be equated conceptually. In the chapter devoted to public debt (book 5, chapter 3 of An Inquiry into the Nature and Causes of the Wealth of Nations), Smith decries the “sophistry of the mercantile system” inherent in the claim that debt makes a nation no worse off when owed to its citizens; as we have seen, the fact that a government can borrow from the inhabitants of the country, whatever the ill effects, distinguishes public borrowing from that of a household. Smith points out that in his day the public debt was not owed entirely to British citizens, as Dutch creditors were due a portion. But, he argues, even if such were the case, the assertion that “it is the right hand which pays the left” is highly misleading.
The state’s payment of the debt through the imposition of taxes has deleterious consequences. Smith contrasts the owners of land and the holders of capital stock, both of whom maintain particular resources and are harmed by excessive taxation, with the public creditors. The latter have only a general interest in “agriculture, manufactures, and commerce” insofar as their operation leads to the repayment of debt. This general interest does not allow them to see the difficulties faced by individual farms and firms, and as such prevents creditors from appreciating the particular entities that together constitute the generalized economic landscape. We see here an emphasis on how the perspectives of economic actors differ, in terms of sector and scale, and with it a potent demonstration of the shortcomings of the metaphorical connection between household and government borrowing, as no such demographic cleavages are to be found in a household.
Earlier in the same chapter, Smith had invoked a hypothetical individual’s borrowing to describe different components of government debt: he likened a situation when a sovereign need not allocate specific resources to pay off a debt to an individual’s drawing on “personal credit,” which Smith then subdivides further. However, in his explanation as to why a government contracts these debts—namely to pay the army and navy or to provide “subsidies to foreign princes”—or indeed how the relevant bills can circulate at or near par—which is due to the Bank of England, which often “agree[s] with government”—we see a clear end to the analogy. Thus the invocation of types of household borrowing is only meant to distinguish the existence of one type of government borrowing from another, rather than to say that the operation of government and household finances can be understood in terms of one another.
Much of Smith’s text aims to refute mercantilist thinking. His contemporaries in Britain and elsewhere who espoused mercantilist ideas were members of a tradition that emerged in Italy. In 1613, the Neapolitan Antonio Serra published A Short Treatise on the Causes that Can Make Kingdoms Abound in Gold and Silver, even without Mines. Serra’s motivation for writing his treatise was to demonstrate that the accumulation of wealth resulted from pursuing the right economic policies, rather than from the endowment of natural resources.
Before beginning his explanation, the first of its kind he tells us, Serra opens by describing how widespread is the assumption that proper governance requires no special expertise. “[W]hatever danger may threaten and [though it has] a complex remedy, there is offered some solution, even by the ignorant fool, … and if it fell to him to govern, he would provide [it]” (Breve Trattato 1). Serra goes on to say that this tendency emerges from the conviction that every person can distinguish right from wrong; indeed children have this ability, nodding or shaking their heads to convey who is right and who wrong is a particular situation. Serra thus begins his treatise by calling to mind the image of a parent instructing a child, and he paints this picture precisely in order to refute the notion that quotidian domestic sensibilities offer preparation for management of a state’s economic policy.
Serra found himself arguing against a mindset that had been refuted in c. 300 BCE by a contemporary of Aristotle. We find ourselves struggling against this same mistaken thinking 400 years later. The current negotiations over the debt ceiling seem quite unlikely to produce a fundamentally new approach to the issue of public debt that would preclude such brinksmanship in the future; the bad metaphor that is still a blot on the public discussion of this issue needs to be demolished first. It’s a tear-down if ever there were one.