11 thoughts on “The “Household Fallacy” fallacy”

  1. Posted 11/08/2017 at 14:31 | Permalink

    Many commentators on this topic quote Keynesian economic theory to support their opposition to so called “Austerity”. In some respects there is merit to their argument. Restricting or significantly curtailing government expenditure at the start of or during a recession is only likely to make matters worse, as evidenced by the Great Depression or more recently the EU’s (aka Germany’s) spending constraints on Greece. However, a great deal of these commentators miss or conveniently ignore the other side of the Keynesian equation. Keynes only advocated a budget deficit as a tool for assisting a government to blunt the social and economic impact of a recession. Keynes expected a government during normal or boom times to be running a surplus. The problem in the UK is that during the boom years of the 00s, i.e. during the New Labour administration, the government did not run a surplus. In fact after the New Labour administration’s first term they went from a surplus to an increasingly large deficit. Many on the left will argue this deficit was not particularly large by historical standards, but what they are missing is those were boom times. A sensible government should have been running a surplus. Globally banks and markets were drunk on cheap credit and that is when the government should have got it’s house in order. Instead when the crisis struck we went from deficit to record deficit. It is at that point, as you so rightly identify, there comes a tipping point when even a government can’t just keep borrowing without the creditors starting to question whether they will get their money back.

  2. Posted 11/08/2017 at 17:59 | Permalink

    Donald Trump said that governments don’t need to default on their debts because they can ‘print the money’.
    This is what people have concluded from central banks’ ‘quantitative easing’. The less government does to balance the books, the less the public thinks it needs to do, and the harder it gets.

  3. Posted 14/08/2017 at 15:59 | Permalink

    I entirely agree with the article above, which makes it a rare piece of commentary indeed in today’s times.

    One thing I find peculiar however is why investors seem to continue to believe in the soundness of the UK’s economy. I think this was one of Ann Pettifor’s arguments in a recent radio programme, where she noted that the most recent gilt auctions had been many times oversubscribed – implying that we, as a nation, are nowhere near the danger identified above (higher interest rates because investors demand a premium for taking the UK’s credit risk). Is this because we are witnessing a ‘race to the bottom’ in the sense that all the major economies are engaging in QE (ie so investors may not like the fact that the sterling they are being given when the gilts are repaid is “printed” but they would be getting “printed” dollars/Euros/etc so it becomes more a question of which economy is less poorly managed than the next)?

  4. Posted 14/08/2017 at 17:31 | Permalink

    Ah. “The Household Fallacy Fallacy” Fallacy. Utter neoliberal claptrap.

  5. Posted 15/08/2017 at 07:36 | Permalink

    Go on then, Luke.

  6. Posted 15/08/2017 at 23:09 | Permalink

    Presumably believers in the Household Fallacy live in a state of constant rage or bafflement. If governments are able to spend with impunity and keep enriching the lives of all their citizens without negative consequences, why hasn’t a single administration ever been able to figure this out and go on to prove the point? It’s not as if they have lacked the incentive, so perhaps every single government in world history has been fooled by this fallacy!

  7. Posted 16/08/2017 at 00:13 | Permalink

    Interest payments on the national debt are running at 3% of GDP, and investors are willing to pay the govenment to borrow from them at maturities up to 20 years. Is the same true of households?

    Pettifor & Murphy are right. Households experience pressure to reduce gearing the older they get because of debt write-off risk faced by their counterparty if they die. This is not true of governments, as their income is from current and future households, and they can’t go bankrupt.

    No sensible investor cares about the repayability of all government debt for the same reasons debt is tolerated on mature company balance sheets. In the long-term, stabilising debt/GDP is acceptable, as tranches of debt stock can be refinanced by new households. There is then an impressionistic investor assessment to be made of whether borrowing is going to increase the denominator enough to offset the numerator.

    Our current debt is not so scary if you consider in 1950 it was about 250% of GDP: http://www.ukpublicspending.co.uk/uk_national_debt_chart.html

    The real value was largely inflated away, not repaid. The economy did not suffer lasimg consequences – we were not ‘punished’ by investors demanding higher rates of return.

  8. Posted 16/08/2017 at 19:14 | Permalink

    @MXM – If inflating away debt was such a good idea, why did we suffer stagflation by the 1970s? How did having higher inflation over a long period benefit us relative to (say) Germany? Since we attained control of inflation our economy has performed relatively better.

  9. Posted 17/08/2017 at 13:27 | Permalink

    @MXM – It is obviously easy to demonstrate that governments are not completely analogous to households. It is also easy to show that incurring a debt and paying it off later can be a wise move. Or that operating with a certain amount of debt on the books is normal and healthy for a wide range of economic entities.

    However, the argument is over whether governments can continuously spend more than they receive without dire consequences. Are they somehow immune from good financial management? The answer is they are not. You admit this when you say that ‘in the long-term stabilising debt/GDP is acceptable’.

  10. Posted 17/08/2017 at 19:40 | Permalink

    @MXM – banks (and by association depositors and investors) are willing to lend to households for 20 years plus it’s called a mortgage. Cataclysm aside there will always be some form of government in the UK, but that doesn’t mean that investors will always be willing to invest in Gilts maturing in 20 years at 3% per annum. Investors invest in Gilts because the UK has a track record of honouring its debts. If the government defaults or there is a debt write-down or even any hint of a debt write-down then the economic consequences for the UK would be dire. Investors are likely to demand significantly higher interest rates or will just not invest in Gilts full stop. If the latter occurs and the IMF or some other global organisation doesn’t bail us out (on their terms see Greece current day) then the only options are to decrease government expenditure or print money, which is likely to lead to an inflationary spiral. So in essence like people governments can go bankrupt. Would any sensible investor buy Greek government bonds? Venezuelan bonds? Zimbabwean bonds?

    The comparison with the 1950s is disingenuous as the ratio of debt to GDP resulted from the costs of fighting a lengthy war. The costs were a one off and investors knew that. In addition at the time the UK like America was a safe haven in an uncertain world. If as a nation we are seen to be increasing our borrowing just to cover the ever increasing day to day costs of government and welfare state then that is a long term structural issue and I doubt investors would be so forgiving. Particularly as we have an aging population with absolutely no reserves to pay the spiralling costs of pensions and health care.

  11. Posted 17/12/2017 at 14:59 | Permalink

    ‘governments can keep borrowing only if creditors continue to believe they will be able to meet the interest payments.’
    The article has no validity, as summed up by the above quote. A government spends money into existence and taxes it out. Spending is logically anterior to taxation/borrowing. A government issuing its own fiat currency under floating exchange rates has no operational need to borrow. Debt sales are purely voluntary and provide the non-government sector with an interest-bearing risk-free asset as opposed to a non-interest bearing one.
    When the government spends it adds reserves to the banking system, when it taxes it drains reserves- you can’t drain before you add! The central bank could leave the reserves in the system and allow the overnight rate to fall to zero if it wished to.
    ‘Free market’ advocates clearly consider that the private sector uses resources more efficiently than the govt. I don’t agree but at least this forms the basis for a valid argument. However, to say that a government which issues its own fiat currency under floating exchange rates is somehow revenue constrained like a household is economic illiteracy.

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