By L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City who also writes for New Deal 2.0
Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household's budget: "No household can continually spend more than its income, and neither can the federal government". On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household. Let us enumerate some relevant differences.
1. The US federal government is 221 years old, if we date its birth to the adoption of the Constitution. Arguably, that is about as good a date as we can find, since the Constitution established a common market in the US, forbade states from interfering with interstate trade (for example, through taxation), gave to the federal government the power to levy and collect taxes, and reserved for the federal government the power to create money, to regulate its value, and to fix standards of weight and measurement-from whence our money of account, the dollar, comes. I don't know any head of household with such an apparently indefinitely long lifespan. This might appear irrelevant, but it is not. When you die, your debts and assets need to be assumed and resolved. There is no "day of reckoning", no final piper-paying date for the sovereign government. Nor do I know any household with the power to levy taxes, to give a name to "” and issue "” the currency we use, and to demand that those taxes are paid in the currency it issues.
2. With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called "a fund to meet future deficits." In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson's efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.
3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. I don't know of any case of a national depression caused by a household budget surplus.
4. The federal government is the issuer of our currency. Its IOUs are always accepted in payment. Government actually spends by crediting bank deposits (and credits the reserves of those banks); if you don't want a bank deposit, government will give you cash; if you don't want cash it will give you a treasury bond. People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government's dollars. I wish my IOUs were so desirable. I don't know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency. OK, some counterfeiters try, but they go to jail.
5. Some claim that if the government continues to run deficits, some day the dollar's value will fall due to inflation; or its value will depreciate relative to foreign currencies. But only a moron would refuse to accept dollars today on the belief that at some unknown date in the hypothetical and distant future their value might be less than today's value. If you have dollars you don't want, please send them to me. Note that even if we accept that budget deficits can lead to currency devaluation, that is another obvious distinguishing characteristic: my household's spending in excess of income won't reduce the purchasing power of the dollar by any measurable amount.
If you put your mind to it, you will no doubt come up with other differences. I realize that distinguishing between a sovereign government and a household does not put to rest all deficit fears. But since this analogy is invoked so often, I hope that the next time you hear it used you will challenge the speaker to explain exactly why a government's budget is like a household's budget. If the speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a "sustainable" pattern?
Randy Wray bring in the key MMT point that the government as currency issuer is completely different from households (firms, states in the US, and countries in the EMU). Bill Mitchell lays out the implications of this as a vertical-horizontal relationship between government and non-government (domestic and external) Barnaby, better to walk before we run, and develops it in Stock-flow consistent macro models. Warren Mosler debunks the other prevalent myths in 7 Deadly Innocent Frauds
When in the last 221 years have the liabilities of the USA exceeded 4x GDP?
“I don't know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency”
Households with a credit line do exactly that – create bank deposits by borrowing through their bank, just like the government creates deposits by writing checks drawn on the central bank
(reserves are beside the point)
I’m just a working stiff, certainly not an economics professor, but this article smacks of a strawman argument. I fail to see how any of these differences are relevant.
When you’re in debt you’re paying interest to someone. This is true whether you’re a household or a country. Unless this article was written to counter some specific instances of demagoguery then I would posit that this point is the central thrust of anyone trying to make the comparison between a household and our country.
1. Age has nothing to do with anything. Since debts or assets are passed on in some form or another, the fact that a household “ends” is irrelevant. 2. Since we’ve always been in debt it’s okay to always be in debt? 3. This ignores the idea that some pain should be expected to get us out of a bad situation (indebtedness). This also ignores the idea that the people getting the money from the interest on our debt might have some power to affect government and markets and do things that make it *look* like being in debt is the best way to be. Please tell me that major market players wouldn’t do things that harm the overall market in order to boost their positions or make more money. And please tell me that those groups haven’t been doing this for hundreds of years. 4. This is irrelevant. Please see the point about paying interest on debt. 5. Inflation *does* erode our dollar. The only way for ever-increasing debt to not crush us altogether is to inflate our way out of the debt burden. This has been happening on a continual basis. Ron Paul talks about this all the time. It seems evident to me from the reading that I’ve been able to do over the last few years of following the housing bubble that this is the only plausible strategy for Bernanke et al. They plan to inflate us out of this mess at some future time.
Please someone blast my arguments to pieces, as I’d love to be more educated on these fine points. But please start with an explanation of how paying interest to someone is better than floating a surplus, regardless of whether you’re a household/individual or a country.
Did you say, “Clinton surpluses”? Clinton may have signed those budgets, but he sure as hell had nothing to do with producing them. The GOP got squirelly on spending with Bush’s “compassionate conservative” BS, but the big deficits didn’t start showing up until 07 when Nancy and Harry took over.
No Way, Prof Wray. Your assumption is that the government exists in its own contained system and does not interact with anything else (this is not a surprising assumption coming from most ivory tower economists), but you’re forgetting that there is market and there are other nations. The market WILL give a vote of no confidence to the government if its debt outpaces its ability to service it or that the interest payments eat-up all productive activities within a country. Sure, the government can push the reset button by starting a new currency regime or use inflation to erode away the debt but a leading nation like the US will suffer irreparable damage in its reputation and standing in the world. Nations and empires do go bankrupt, that’s a fact. The market is the check-and-balance on the government.
Is the professor trying to argue that trees can indeed grow to the sky? If not, then what is a tolerable level of deficit? What is the optimum level of deficit, and how would one measure it? Optimum by whose standards?
Most people believe our debt/deficits are too high. When politicians spout folk wisdom about the nation needing to balance its books like a household, they’re not making a technical argument about whether a growing economy can support continual deficits at some finite level. Neither are they necessarily demagoguing. They are appealing to the common sense of the people who believe that doubling our debt in the next ten years (or five years, if growth remains sluggish and spending is not cut) will have negative consequences that outweigh the real or imagined benefits. I guess pedants like the professor cannot see beyond the literal meaning to what is actually being communicated.
He may believe we should follow Japan to a double-decade stagnation with exploding debt. Most Americans do not. Further, he doesn’t really help his case by raising the specter of inflation and currency devaluation as a remedy. You won’t find too many Americans, especially those who lived through the last bout of high inflation, on his side if that is the “solution” he’s offering up.
“People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government's dollars. I wish my IOUs were so desirable. I don't know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency.”
Of course the Sovereign CAN use its power to force people to accept its IOU’s. But the enlightnment movement precisely found that LIMITING the exercise of the Sovereign raw power( through laws, checks and balance, etc…) had a positive impact on the population welfare. This is why UK and the US became dominant power in the 19/20th Century, replacing autocratic continental europe powers and China. Having a “household-like” budget in times of Gold Standard, or an independent Central Bank a la Bundesbank with a low inflation mandate in times of credit based money (an independent Central Bank is really a distinct Branch of Government), is one of these limitations to raw power that are components of a democratic country. In times of emergencies, (like for instance during ww2), it is legitimate to use the full strenght of raw power, but doing it in normal times negates what modern democracy is about.
This Hobbesian view on the Sovereign budget constraints is a very dangerous slope.
Wray: The Federal Budget is NOT like a Household Budget "“ Here's Why
By L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City who also writes for New Deal 2.0
Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household's budget: "No household can continually spend more than its income, and neither can the federal government". On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household. Let us enumerate some relevant differences.
1. The US federal government is 221 years old, if we date its birth to the adoption of the Constitution. Arguably, that is about as good a date as we can find, since the Constitution established a common market in the US, forbade states from interfering with interstate trade (for example, through taxation), gave to the federal government the power to levy and collect taxes, and reserved for the federal government the power to create money, to regulate its value, and to fix standards of weight and measurement-from whence our money of account, the dollar, comes. I don't know any head of household with such an apparently indefinitely long lifespan. This might appear irrelevant, but it is not. When you die, your debts and assets need to be assumed and resolved. There is no "day of reckoning", no final piper-paying date for the sovereign government. Nor do I know any household with the power to levy taxes, to give a name to "” and issue "” the currency we use, and to demand that those taxes are paid in the currency it issues.
Ok. Households time will be up much faster than Government. But in case of governments, when income is far lower (tax revenues are lower) than expenditure (unemployment benefits, bailouts, subsidies etc.) then while the “day of reckoning” may be far away, your cost for footing the bill goes up consisitently (in a free market). Will that not be enough to make “day of reckoning” arrive much sooner than expected
2. With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called "a fund to meet future deficits." In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson's efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.
Ok. But that was when the growth story was seen to be good enough. So it was expected that we may be able to repay the principal and interest from the future. If this is no longer true, then your ability to accumulate debt reduces considerably. It just goes to prove that if it was possible to generate bubbles and illusory propserity on an endless basis, then this 230-odd years could extend to 500-odd years, but it seems creating bubbles endlessly may not be possible
3. The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. I don't know of any case of a national depression caused by a household budget surplus.
“I don't know of any case of a national depression caused by a household budget surplus”
Is the reverse true? We are seeing this!!
4. The federal government is the issuer of our currency. Its IOUs are always accepted in payment. Government actually spends by crediting bank deposits (and credits the reserves of those banks); if you don't want a bank deposit, government will give you cash; if you don't want cash it will give you a treasury bond. People will work, sell, panhandle, lie, cheat, steal, and even kill to obtain the government's dollars. I wish my IOUs were so desirable. I don't know any household that is able to spend by crediting bank deposits and reserves, or by issuing currency. OK, some counterfeiters try, but they go to jail.
“Its IOUs are always accepted in payment” .. Till the federal government has to borrow to redeem the IOU.
5. Some claim that if the government continues to run deficits, some day the dollar's value will fall due to inflation; or its value will depreciate relative to foreign currencies. But only a moron would refuse to accept dollars today on the belief that at some unknown date in the hypothetical and distant future their value might be less than today's value. If you have dollars you don't want, please send them to me. Note that even if we accept that budget deficits can lead to currency devaluation, that is another obvious distinguishing characteristic: my household's spending in excess of income won't reduce the purchasing power of the dollar by any measurable amount.
“my household's spending in excess of income won't reduce the purchasing power of the dollar by any measurable amount”
true as long as it is only your households. When it involves million households and they go bankrupt and the Fed prints money, to make the banks (who would have lost the money) whole, then the purchasing power reduces by measurable amount
If you put your mind to it, you will no doubt come up with other differences. I realize that distinguishing between a sovereign government and a household does not put to rest all deficit fears. But since this analogy is invoked so often, I hope that the next time you hear it used you will challenge the speaker to explain exactly why a government's budget is like a household's budget. If the speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why we have managed to avoid retiring debt since 1837-is 173 years long enough to establish a "sustainable" pattern?
“is 173 years long enough to establish a "sustainable" pattern?”
Not when you do not see opportunities to create fresh bubble or when your tax revenues are diminishing
Folks– remember, as a sovereign issuer of currency, the USG does not have to borrow money to run a deficit. Think this one through folks.
quite true, but issuance of currency appropriates the labors of its citizenry.
You are assuming inflation will be the result. We have 17% unemployment, tons of stores being closed, low capacity utliization. The government can keep “printing” with no adverse consequences until inflation kicks in. No risk of that until we see a real turnaround, not this bumping along a bottom with lots of slack in the system.
And this hard money fixation is an illusion. Under the gold standard, when the value of money was supposedly stable, you had big swings from pronounced inflation to pronounced deflation over short time periods. Go back and check the stats from the gold standard era. It was hugely disruptive to businesses and farmers (remember William Jennings Bryan’s “Cross of Gold” speech? He was against the very same idea you are upholding because it hurt farmers so much).
You really need to do your homework. In all honesty, this and your comment below just show you are not only out of your depth, but completely unwilling to learn.
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