ANALOGIES, ECONOMICS AND THE AMERICAN DEBT “CRISIS”

Perhaps the strangest and most depressing thing about the situation unfolding at the top of American politics this month has been how little of it has anything to do with the actual economic situation facing America. As I started writing this piece there was a senior Republican congressman on my television explaining how the Boehner plan (which would cut another $900bn of government spending out of an economy that was already finding growth hard to maintain) made sense. It was, he said, because when a family finds money tight they can’t go on eating steak and lobster, they have to cut back and have hotdogs and fries.

The comparison between the American government budget and a household budget has been a repeated theme in this unappealing bunfight. It’s a favourite narrative of the Tea Party and senators like Ron Paul. There’s a longer – but still simplistic – version of this argument here (from Reddit via boingboing) which describes the debt ceiling as like an individual’s relationship with their credit card.

It’s the kind of analogy that one has come to expect from American politics – folksy, simple and fundamentally wrong.

There are lots of reasons its wrong, but they include the facts that:

  • The American government prints money and that money is in demand all around the globe;
  • American debt is overwhelmingly held by Americans;
  • The majority of American debts that are held overseas are held in treasury bonds by countries that have no intention of cashing in because they are regarded as an asset almost as secure as gold – a fact that won’t change in the near future;
  • The American government can, if it wanted, increase taxes to bring in more money – simply reversing Bush Junior’s tax cuts for the wealthy would reduce America’s debt dramatically (and would mean the burden of repayment shifted significantly from the poor to the rich). Or they could reverse some of the decline in corporate taxation which, in the 1960s made up over 30% of American tax revenue but now accounts for around 9%.

If you insist on comparing American debt to a household’s debt then it would be a household where most of the money was owed by one member of the family to another (by the wife and children to dad, for example) and that photocopied their own cash in the basement. It would be a household where the people outside the family who were owed money would never cash the family’s cheques but instead swap them between each other as a form of currency. And, even if the day ever came when the debtors did demand cash, the family’s wage earners can simply decided that they should be paid more by their employers and easily cover the costs.

So not like the average family at all.

But it’s not so much the flaws in the analogy that bother me, it’s the way the analogy has moved from being a flawed but understandable explanatory tool to a template around which policies are being cut. There’s nothing wrong with using analogies to explain complex issues in a discussion but when the simplified explanation begins to replace an understanding of the complexities beneath, disaster awaits.

Economics is often difficult, sometimes counter-intuitive and frequently hard to explain but keeping a grasp of that complexity is crucial to the job of keeping an economy working. To use an analogy to explain the problems with understanding the world through analogies: schoolchildren are taught to imagine atoms being made up of particles that are like different sized little balls spinning around each other. That explanation, so-far as it goes, can be helpful. But any attempt to design complex, modern, electronics using that model is doomed to failure. You can’t make a microchip without understanding how electrons actually work. Economics is like physics, more-or-less.

The belief that the economy should be treated like a household budget leads to misunderstanding or deliberate misrepresenatation. It brings with it an obsession with balanced budgets over the short term (conveniently ignoring the fact that the majority of households take on large-scale, long-term debt such as mortgages and rely on a rising housing market and inflation to reduce the value of the debt as much as their income to ensure the ability repay the borrowed sum) and an equally strong fascination with achieving balance through the cutting of expenditure (because families don’t tend to have control of how much money is coming in).

This, of course, suits the ideology of the Tea Party (and their fellow travellers in the UK), whose overriding ideological aim is the reduction in the size of government and the setting “free” of citizens of independent means from the interference of the state.

Whatever the merits (or otherwise) of this ideology, the argument that the current state of the American economy is the result of high levels of government spending (and therefore that its undeniable problems can be solved by spending cuts) simply doesn’t survive close scrutiny. Times are tough and I’m not going to rehearse in detail the condition of the American economy but, while unemployment is high, public spending has risen as a proportion of GDP (though not as much or for the reasons most right wingers imagine, as Paul Krugman explains) and debt has spiked to 103% of GDP, the American economy is not a basket case.

A period of rapid growth in the after recession was only choked off by a failure of nerve in the Obama administration. The biggest factor in this current economic slowdown is, as Paul Krugman (again) points out, because the American government has slashed spending just when it needed to maintain investment levels to see the economy through straitened times. The rise in Federal spending as a proportion of GDP (from 19.6% in2007 to 23.8% in 2010) is mostly accounted for by the contraction of GDP in the recession (the same amount of government spending now accounts for a higher proportion of a smaller economy) and a rise in essential spending on safety-net services for those who are losing out most. Nor is American debt as a proportion of GDP outrageously high by international standards, Japanese debt, even before the recent disaster, dwarfed American debt and yet Japan’s economy is generally not considered to be at risk of default nor under serious pressure. America’s economy is, in truth, far more secure than Japan’s. Debt repayments are around $360bn per year, this sounds like a lot of money but it amounts to just 1.6% of America’s GDP – a figure that is low by historic standards (partly because of low interest rates) and is perfectly sustainable for the foreseeable future.

Here is the truth of the current American “debt crisis”.

There are issues in the American economy that need to be addressed with but there are lots of alternatives to swift, deep cuts that punish the poorest in society for a disaster they didn’t cause. And all of these alternatives can be tried long before American debt becomes any sort of immediate threat to the US or world economies.

There is no crisis. Or rather, the crisis is political and has been constructed to serve specific ends.

Michel Foucault’s theory of problematisation describes how in, for example, the history of medicine certain interests use their position to alter the perception of an issue to create a “problem” which they can “solve” by the application of their expertise. In doing so they gain control, they enhance their ability to shape society and they shift how we see the world around us. This shift is epistemological and how we understand things is a reflection of the intense interrelationship between knowledge and power in our society. The application of knowledge/power changes in the way we see a “problem” and it fundamentally shapes how we imagine it can be solved.

And so it is with the “family budget” analogy.

This analogy seems harmless, a “common sense” means of explaining a complex issue and yet it is carefully constructed to shape the debate and force it down a rigid path.

  • It apportions blame on those who have done no wrong by assuming that the problem is caused by the state living beyond its means.
  • It limits the range of policy responses that seem possible, allowing only for cuts and not for tax rises.
  • It punishes those who have already born too much of the weight of this recession while making no demands upon those who caused it.

So we shouldn’t lose sight of the facts.

Nations are not like families.

National budgets are not like household budgets.

And folksy analogies are not like the truth.

Analogies obscure reality just as much as they reveal it and, in politics, what is obscured can be very revealing.

[There is a follow-up to this post here which
responds to some of the posts made by Chris, below]
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3 Responses to ANALOGIES, ECONOMICS AND THE AMERICAN DEBT “CRISIS”

  1. admin says:

    As a (slightly ironic) aside, one way the US government could cut public spending a free up a significant chunk of GDP for debt repayment (or anything else) would be to introduce a socialised medical system on the model of Germany, France or Japan. America spends 16% of GDP on healthcare, Japan spends 8%, Germany and France around 10% and all three have significantly higher proportions of doctors carrying out far more consultations and with far higher capacity in their systems and, of course, they all have practically universal coverage. Perhaps the Tea Party could be persuaded to adopt this policy as a means of reducing the size of government? No? Just a thought…

  2. Chris says:

    OK, i will bite:

    “the budget…is not like a household……There are lots of reasons its wrong, but they include the facts that: The American government prints money and that money is in demand all around the globe;”

    By this reasoning, you argue we should completely disregard the most fundamental tenet of economics, in that if the US dollar becomes as abundant as toilet paper, its worth will still be magically maintained, even as its supply goes up??
    Is the demand for toilet paper inelastic? how about US dollars? Mmmm, wait, maybe if they are used as toilet paper…you may be onto something!

    “….American debt is overwhelmingly held by Americans…..”
    Yes, because its totally OK that babies should be on the hook for $49,000 (unadjusted) US debt the moment they are born, right?
    Or because since the FED owns 50% of it, its totally OK to run the printer tomorrow to pay the nation’s bills, even if it devalues my savings account purchasing power by 30%, 40%, or more?

    “…..The majority of American debts that are held overseas are held in treasury bonds by countries that have no intention of cashing in because they are regarded as an asset almost as secure as gold – a fact that won’t change in the near future…..”
    Yes, almost as secure as gold…..which is why China, Russia and India are not already dumping US sovereigns or talking about converting their US reserves into some other kind of asset?
    Or wait! maybe you need a little history refresher, and not realize that no currency has ever survived more than a hundred years, while gold has always been secure as a store of value since the inception of currency?

    “…..The American government can, if it wanted, increase taxes to bring in more money……..”
    Even if you taxed every single US citizen at 100%, you would still not pay more than half the US debt. This does not even include unfunded liabilities. And, since when has higher taxes made politicians spend less and getting into more debt, I dare ask? Oh, also, i missed the part where the govt of a supposedly “free republic” can own the bodies of its citizens to coerce for bureaucrat’s largesse, to an amount that is almost 50% of everything he/she makes.

    Using the “household budget” analogy is not playing with facts as you are. It is a clear-cut example to boil down the keynesian/supply sider argument of “Getting out of debt, by getting into more debt” as so outrageous that the average person is not confused by your voodoo economics.

    Saying that household/govt budget relationship does not hold is akin to claiming that excess supply doesn’t have consequences. Yet i have to find a book stating that oversupply doesn’t matter, or that water is not H2O

    In reality, saying this analogy does not work only serves to obscure the real issue and the failure of methods of people that claim to “understand economics”, by claiming that up is down, and east is west. Ha.

    Again, i will restate:
    What household can honestly claim they are getting out of debt, by increasing their net debt?

  3. admin says:

    Chris, thank you for your comments. Rather than try to respond here, I’ve created a new post: http://www.mmcgrath.co.uk/?p=1873