Has the credit card analogy been maxed out?

A recent article by Alex Hern at the New Statesman has argued that likening the UK economy to a credit card is ‘pernicious’, and in a resulting exchange via Twitter he has called it ‘idiocy’ to use it.

He has a good point. Government borrowing is not a credit card and there are important differences between the two. As he says, the UK government has the power to print money, and government spending has a direct influence on government ‘income’. But this is supposed to be an analogy, not a literal depiction. (We should also remember that the credit card analogy is really a subset of the analogy of thinking of government like a household. Again, there are massively important differences between the two. But if the goal is public education, putting concepts into a situation people are familiar with is legitimate).

The reason why I think the credit card analogy has uses is because there is an upper limit to both government borrowing and credit card borrowing. And the closer you are to it, the more dangerous it becomes. Ability to print money does not change this fact.

Hern uses the following quote from David Cameron: ‘Labour’s central argument is exactly that. They say that by borrowing more they would miraculously end up borrowing less. Let me just say that again: they think borrowing more money would mean borrowing less. Yes, it really is as incredible as that.’

Does anyone really think that Cameron is saying it is impossible, in any conceivable scenario, that borrowing more in the short term can lead to less borrowing in the long term? Does Cameron honestly believe that it is ludicrous to go into debt whilst a student?

I don’t – I think he’s making a political point by trying to simplify an issue to present a stark difference between himself and his opponents. It’s what politicians do all the time, on both sides.

We need to be very careful about criticising the use of analogies just because politicians hijack them (and their political opponents misrepresent them). Cameron’s politically motivated over simplification does not mean it is a useless analogy. Lest we forget we live in a country where the majority of the population think the public debt burden is falling under the current government. Analogies are an essential tool for economists to convey certain ideas, and perform their task of educating the general public. Hern’s appeal to dispense with ‘trite’ analogies and ‘dumbed down’ explanations in favour of reading professional economic analysis strikes me as being somewhat elitist. I’d prefer it not to be politicians that make them. But we need better, fuller, analogies – and a wide conversation with few barriers to entry.

I actually think Hern does himself a disservice. He lists four counter examples to Cameron’s quote, all of which make the case that under certain conceivable situations more short term borrowing can reduce the longer term debt burden. I think they’re good analogies, and neatly convey the four very different mechanisms that he’s considering. I’d like a debate about the extent to which they apply. In each example the key issue is (1) when will the longer term arrive? and (2) what is the process by which the spending will have an impact?

My disagreement with Hern is whether utilising these analogies has any part to play. Sure, once you get to the level of answering the questions I’ve raised, you want to move beyond them. But unless we want economics to be an entirely internal conversation between professional economists, we need to have ways to communicate with non-specialists. It strikes me that if ‘upskilling’ were indeed a valid rationale for even more spending now, then the way to respond to the credit card analogy is by talking about student debt. A lot of my living costs whilst doing a PhD were funded through credit cards. If anything the problem is that when it comes to credit cards the costs are internalised and you have accurate information about your situation; when it comes to government spending the incentive and knowledge problems are significantly higher. Use analogies to beat analogies. Indeed it’s a sign of the quality of the credit card analogy that you can do this.

The irony is that analogies are everywhere, and if we’re going to start dispensing with them how about the notion that the economy is some sort of machine? That government ‘controls’ various economic indicators? That we need to ‘kick start’ it? I’d love someone to try to go through the New Statesmen website and strip out every time they’ve used an analogy!

Moreover analogies aren’t simply a way economists communicate their theories. They’re not only important for public discussion. Analogies provide the basis of those theories. What do we know about the signal extraction problem, without the analogy of agents stranded on different islands? Monetary theory and Krugman’s baby-sitting coop? The Fisher effect and Mises’ analogy of the master builder? I for one learnt a lot from Paul Krugman’s willingness to embrace an analogy about sushi.

My suspicion is that Hern’s unhappiness with the credit card analogy is not because analogies are the wrong way for the public to discuss the economy, that they have no place in academic discourse, or even that this is an especially bad analogy. I suspect it’s because it’s a reasonably effective one, and it’s conveying an idea he disagrees with. In which case explaining why the analogy doesn’t hold would be the best way forward. At least that way he’ll still be able to use them when it suits him, without being a hypocrite.

Shadow Monetary Policy Committee

Anthony J. Evans is Associate Professor of Economics at ESCP Europe Business School. His research interests are in corporate entrepreneurship, monetary theory, and transitional markets. He has published in a range of academic and trade journals and is the co-author of The Neoliberal Revolution in Eastern Europe (Edward Elgar, 2009). He has conducted policy research for the Conservative Party and European Investment Fund, as well as managing consultancy projects for several corporate sponsors. He teaches Executive MBA classes across Europe and has written a number of Harvard-style cases. His work has been covered by most broadsheet newspapers and he has appeared on Newsnight and the BBC World Service. Anthony received his MA and PhD in Economics from George Mason University, USA, and a BA (Hons) from the University of Liverpool, UK.

2 thoughts on “Has the credit card analogy been maxed out?”

  1. Posted 11/03/2013 at 15:23 | Permalink

    Wasn’t Alex Hern’s point that it was the use of the credit card analogy in particular, rather than analogies per se, that he had a problem with?

  2. Posted 11/03/2013 at 16:05 | Permalink

    “Does anyone really think that Cameron is saying it is impossible, in any conceivable scenario, that borrowing more in the short term can lead to less borrowing in the long term?”

    This is the problem. I think this is exactly what Cameron *is* saying. Whether he believes it is another matter. But the point is I don’t think he is trying to use an analogy to simplify matters and spread understanding beyond an economically literate elite. Rather than explain why he thinks Labour are wrong he’s just pulling silly faces and going “eeh, reet daft innit”.

    He’s either stupid, or patronising. The public deserve a better analogy. And a better Prime Minister.

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