It's a prevalent idea, that the federal budget can be easily compared to a family or business budget. The idea is simple: if a household or business spends more than it makes, it has to take on additional debt. Interest and payments have to be made on debt, so if the income doesn't increase, and debt continues to do so, eventually all the income will be used to service the debt. Obviously no household or business could persist in such conditions. Eventually, people will stop lending them money and they'll be spending so much money servicing their debt they won't be able to afford to eat.
So it goes with the federal government, we are told. Our friend Letsgetitdone has posted an excellent diary debunking this myth. In line with that, it's constructive to note that our federal government has managed to do something no household or business has ever managed. Except for a handful of years, the federal budget has always added net debt to the federal books. We've almost never had a balanced federal budget and even more rarely posted a surplus.
There is, however, a simple analogy between a household and the federal government that can make sense of the Federal budget, and even make sense of all the little household budgets but it involves telling a little story. Before we get too deep in the weeds of this story though, fair warning: This story starts off simply enough, but soon gets quite complicated. You may get sucked in to a fairly long exposition, or you may try to muddle through without really understanding what's going on. This story is littered with metaphors for our national situation, and while some of these metaphors will be made explicit, many of them will hide, like little gems, for the astute reader to find. And I apologize in advance for the style. If there's one thing my writing needs, it's a good editor.
In this story, we have a Mom, a Dad, and three kids. Like many families, these kids have chores Mom and Dad need them to do, and when they do them, they get an allowance. Now, Mom and Dad are fairly poor and fairly cheap. They can't always guarantee that they'll have enough cash on hand to pay allowances every week, so, instead of paying allowances in cash, they make up a system of "Family bucks" that they use to pay allowances.
Here's how "Family bucks" work: Mom and Dad have a list of chores they want done. They review the list periodically, and seek input from the kids about anything that should be added, but it's mostly pretty stable and standard fare; clean the bathroom, wash the dishes, take out the trash, etc. To get the chores done, Mom and Dad take bids from the kids to do them. The kids figure out how many Family bucks they should be able to get for taking out the trash, for example, then put in a bid to take out the trash for X Family bucks. Mom and Dad accept the lowest bid, and for the next month, that kid's job is to take out the trash, for which he will receive the amount of Family bucks he agreed to.
Now, the kids accept Family bucks instead of real money in part because they have no other choice, but also because at the end of the week, Mom and Dad scrape together some real money, whatever they can afford and think is an appropriate amount, and offer it for sale to the kids. Similar to bidding on chores, the kids bid on dollars with their Family bucks they've accumulated from doing chores. They tell their parents how much real money they want and how many Family bucks they're willing to exchange for that cash, and the parents accept the highest bid, then the next highest bid, and so forth, until the allowance money is depleted for the week. The kids then take the allowance money they've bought with the Family bucks, and go buy their candy bars and action figures.
Now, the kids understand and accept the reasons behind this allowance system, and it's not like they have any choice if they want to get any real money anyway, so they begin to keep and exchange Family Bucks among themselves to get other stuff they want. In the evening, when they each get an hour of TV, the kid who's turn it is to pick the tv show will sometimes sell that privilege to one of the others for some of their FBs. They also sell candy (that they've either bought with real money, helped make or stole from someone else) and toys, and rent toys and even their own time and effort in playing games in exchange for FBs. The youngest kid likes playing checkers, so he sometimes pays his older siblings to play with him. The other kids will sometimes pay their siblings to help out on chores they won the bidding for, and the big-ticket items, like washing the car or mowing the lawn, usually pay so much in FBs and require so much time and effort that it makes sense for the winner of those chores to spend some of his FBs hiring his siblings to help out.
Because these FBs have turned out to be so useful within the household, the kids stop using all of them to buy the cash at the end of every week. They hold some back to be used in these little internal exchanges. Since the amount of cash offered for sale at the end of every week remains pretty stable, and since the amount of FBs payed out by Mom and Dad every week remains pretty stable as well, then holding some of the FBs back from bidding on the cash means that the average bid price for cash drops. The enterprising kid, who's been saving their FBs and making trades with his siblings to get even more FBs, can wait until that bid price drops and then buy up all the cash for sale. Moreover, the overall amount of FBs the kids hold increases over time, since Mom and Dad are paying out roughly the same amount of FBs, but getting back fewer of them when they offer the cash for sale. As long as the overall distribution of FBs remains relatively even among the kids, this means that the prices (in FBs) they charge each other for TV time or for playing with each other's toys will tend to go up. The FBs become worth less over time.
Even worse, from Mom and Dad's perspective, they have less incentive to do the chores. Because Mom and Dad accept the lowest bid to do the chores, the amount of FBs they pay out to the kids becomes outstripped by the savings of the richest kids. The kid with 100 FBs saved up isn't going to bother putting in a bid to do the dishes for 5 FBs (the previous going rate), and if he put in a bid at a rate he would accept, he'd get underbid by the poorest kid, who hasn't saved any FBs and really wants some more so he can afford to watch his favorite TV show this week. This tends to put all the chores off on the poorest kid, and it puts him at a disadvantage when it comes to buying cash at the end of the week. It's hardly fair that he ends up doing most of the work, and ends up with the smallest real reward. After all, he could end up doing all the FB-paying chores that week, and because one of his siblings has saved up so many FBs from previous chores and transactions with their sibilings, still not be able to buy any of the cash offered for sale that week nor afford any of the other things he wants like his tv show or game of checkers. Indeed, the oldest sibling has a hidden advantage; he owns a computer his grandparents got him for his birthday, and he sells play-time on his computer to his siblings for the FBs. This play-time is so desired by his siblings, that he hasn't done a single chore for weeks, and has the highest savings of FBs of them all, so much so that he has started routinely buying up all the cash offered for sale by the parents every week.
To make matters more complex, and at the cajoling of the parents who dislike the noise and unruliness of the kids as a result of this situation, the oldest sibling begins lending his FBs to his siblings. He writes out terms, specifying how much is borrowed, how much more has to be paid back (interest), and when it has to be paid back, and clauses about how much more has to be paid if the deadline is missed. Initially, this means that his siblings are able to put in better bids on cash, and afford to purchase some of the things from each other they want, like TV time. But because there are only so many chores to be done, this means they have to start bidding up the chores so they make enough FBs to pay back their loans with interest and on time. Eventually, they bid the chores up high enough for the oldest sibling to being taking an interest in putting in bids for them again. And because the oldest sibling is obviously a budding banker, and therefore a bit of a jerk, he sometimes underbids his siblings to win the chores, and then hires them for less FBs than he bid to do the chore for him. Because they owe him FBs, they have no choice but to accept those jobs, or else be unable to make their payments to him. This becomes so lucrative for him that he focuses on making money through this route almost entirely. Because his youngest brother owes the eldest, say, 15 FBs per week for a month (unless he can convince him to borrow more), then he has to bid at least 15 FBs for the chores this week to make his payments, while the eldest can afford to bid 14 FBs for those same chores, win them, then hire his youngest brother to do them for 10 FBs, and lend him another 5 FBs to make his payments that week. Boys will be boys, I guess.
So Mom and Dad talk about the situation with themselves, and are determined to rectify it while retaining this overall useful system of Family bucks. They understand that the only reason these FBs are valued by the kids is because they can use them to buy cash from the parents, or other goods and services from each other. They also realize that the problem stems from the accumulation of these FBs, and especially from their unequal distribution. They are, however, loathe to meddle too much in the exchanges between their kids. If the younger kids are willing to do the eldest kid's chores in exchange for playing on his computer, who are they to interfere, they reasoned. So, they set some rules for the kids lending FBs to each other, specifying terms and payment and interest rates, and making sure the kids actually had the FBs they were lending. In at least one case, they caught one of their kids lending FBs to another one they didn't have, he simply wrote out an IOU for the FBs. Because this wasn't the first time they'd done this, the kids were accepting these IOUs as if they were real FBs. The eldest was especially adept at this, and even when he had the FBs to lend, would usually resort to writing out an IOU to his borrower, instead of passing out the real FBs. In line with their policy of not meddling too much, the parents didn't ban the practice of writing IOUs for FBs, instead, they insisted that the kid writing the IOU have sufficient FBs to pay them, or IOUs from their siblings for enough FBs to pay them, or have won enough chores that pay a sufficient amount of FBs to pay them. If the kids were gonna be making promises to each other, the parents reasoned, then they should at least make sure that those promises could be kept.
In line with the principle of honoring promises, the parents also agreed to accept the IOUs for FBs as if they were FBs in the auctions for cash. They figured little bad could happen as long as everybody followed the rules about borrowing and lending FBs, but they allowed the kids to enforce those rules. The lender was supposed to check to make sure the borrower had the assets or claims on future assets to pay back the loan. Astute observers will already notice a problem here, but it takes the parents a little while to catch on. It's Friday, and all the FB for chores has already been paid out. The cash auction takes place on Saturday evening. The eldest kid has 100 FB in savings, and lends 20 to his youngest sibling, who doesn't have any. Rather than giving him the 20 FBs directly, he writes out an IOU for 20 FBs, and the youngest sibling writes out an IOU for 20 FBs, and they exchange IOUs. The youngest then spends his 20 FB IOU with the middle sibling (who has 30 FB saved for the cash auction) for a game of checkers, and the middle sibling then spends that 20 FB IOU with the oldest sibling for a game of Zombie Lego Adventures on his computer. The eldest sibling then tears up that 20 FB IOU (it's his IOU anyway). He now has 120 FB-equivalent, his 100 FB savings plus the 20 FB IOU from the youngest sibling. They do this again, and again, and again, so that by the time the Saturday cash auction comes, the eldest is sitting pretty on 200 FB-equivalent, and can completely swamp out the middle-child's bid for cash, while the youngest child is sitting on a 100 FB debt that does nothing to depress the bid for cash.
Now, the eldest didn't bother to check to see whether the youngest could pay him back for that debt, but he honestly doesn't really care too much. What matters to him is that he's able to win the bid for cash and that he doesn't have to actually do any chores. So, rather than coming down hard on his younger sibling for not being able to pay his IOUs, he re-finances them, lowers the payments, extends the terms, ignores missed payments, and offers even more lending to his younger sibling. The younger sibling readily agrees to these loans, because without them, he wouldn't be able to get anything at all, no cash, no TV, no checkers, nothing, let alone make payments on his outstanding debt. He can no longer win bids on chores because the eldest can always afford to underbid him and then pay him less to do those chores anyway, which he must accept or be unable to make his re-financed payments. And the eldest is always perfectly willing to loan him more FB, even if the youngest can't afford to pay him back, because he can use those IOUs to buy all the cash and hire his other siblings to do his chores for him.
At this point, the parents are nearly at a complete loss. They never wanted one kid to be doing all the work, while another one reaped all the rewards. And because there's only one kid doing all the work, the work's starting to suck. Dishes aren't fully clean. Trash juices trailed along the floor from taking out the garbage aren't cleaned up, waterspots are left on the car, etc. They're thinking about scrapping this whole system, and just forcing the kids to do the chores that need doing, distributing the work to whoever can do it best, and paying out allowances in dollars according to age and the difficulty of the chore. Indeed, if this were a real family, that's probably what they'd do. But this isn't a real family, this is a family analogous to the Federal Governement and the domestic economy, and it's analogous to the state we find ourselves in.
To make this analogy explicit, the real cash dollars are foreign money, the parents are the federal government, the kids are the private sector with the eldest representing the banks and the youngest representing workers, things bought with real dollars are imports; checkers, TV show time and computer games are domestic production, and the Family bucks are the sovereign currency. It should be fairly obvious that Mom and Dad can't "run out" of Family bucks, but how might the kids come to think that's the case?
Let's continue the story and see. Mom and Dad recognize that the youngest kid is getting the sharp end of the stick, and resolve to do something to help out, without being explicitly favoritist to him. They tell the kids that they'd like to do some stuff for 'em, they want to buy the kids a family computer, and take 'em out to a movie and buy them some new toys. But the parents don't want to just "give" this stuff to the kids, they want 'em to earn it. The computer, movie and toys are all "imports" after all, and require that foreign currency known as dollars to buy 'em. Best Buy doesn't take Family bucks. So, the parents say, that in order to do this, they need to be able to put in a bid on the cash offered for their allowance as well. They don't have enough money to save for it from somewhere else, and since it's to benefit the kids, they feel like it should come out of their allowance anyway. But, the parents know that they can just create as many FBs as they want anyway, so they can always out-bid the kids for the allowance money, which they feel isn't fair to the kids.
So, here's what they do: Whenever they see one of the kids paying another one with FBs for something, they come in and take a couple of the FBs they were trading and stick 'em in a jar. They also start holding back a bit from the bid to do chores, so that if you won the bid to do the dishes for 10 FB, you'll get 9 at the end of the week, and the other one goes in the jar. The parents then use the FBs that are in that jar to put in a bid on the cash, that they then save and use to buy the computer and movie trip and toys. Perhaps more importantly, the parents start to borrow FBs from their kids to help finance their bids on the cash. The parents write out an IOU for FBs, then give that to one of the kids in exchange for on of their IOUs for FBs or for real FBs, then stick that IOU or real FB in the jar.
Now, the eldest kid starts to throw a big hissy fit at this. He doesn't want the parents to buy a new family computer, as that would hamper his ability to sell time on his computer, which allows him to buy most of the allowance cash and not have to do any chores. He doesn't like that his parents are now competing with him for the allowance cash, because he knows in his greedy little black banker's heart that they could always outbid him for that cash. He also doesn't like the idea of his parents just randomly coming in and taking some of his FBs when he's selling something to his brothers, or not paying in full for the chores who's bids he won. It is in this latter bit that he gains the alliance of his brothers, who are also somewhat resentful that their FBs are getting randomly taken back by the parents and that chores are no longer being paid in full. And even the youngest, who thinks it'd be a good thing to use some of the allowance money to help everybody out, or at least break the eldest's monopoly on computer games, doesn't like the idea of the parents being able to put in a bid for some of the cash; it amounts to a cut in the real allowance of the kids for doing chores.
So the eldest kid rallies his political support in his siblings, and confronts his parents about this newest modification to the system. Careful to express his concerns in terms of issues like fairness and choices, he extracts a couple of concessions from them. First, they agree that the things they were gonna spend the money they won from the cash-bid using the FBs stored in the jar should be things the kids actually want and that should benefit all the kids. To that end, any kid can propose something for the parents to buy using that cash, but at least two of the three kids have to agree with it in order to go ahead and buy that thing, and any one kid can veto purchasing that thing.
With the threat of a family computer out of the way, the eldest proceeds to extract a further concession. The completion of chores, he argues, isn't really much different than buying toys for everybody; everybody benefits when the chores are done well, as nobody likes living in a messy house, just like everybody benefits when toys are bought for everybody. Therefore, the FB payment for doing chores should come from the jar first, and if there's not enough FB in the jar to pay for all the chores and/or put in a bid on some of the cash, then the parents should borrow the FB they need to do that from the kids. That way, the parents aren't completely unconstrained in their ability to outbid the kids for all that allowance cash. The kids want some assurance that they'll be able to purchase some of the allowance cash for their own use, even though the parents would rather use that cash to purchase something else for the kids.
In return, the parents will also be able to lend FB to their kids, instead of only paying it out as a payment for doing chores, and are allowed to expand their payments to kids, so that Mom can now pay FB to induce her kids to learn chess from her instead of playing checkers, and Dad can pay FB to watch football on Monday nights instead of having to resort to yelling and threats. In this way, by lending FB to their kids and borrowing FB from them as well, they can pretty much control the amount of "interest" the kids charge each other for borrowing FB from each other. If one kid wants 25 FB next week in return for lending 20 FB now, but the parents are only asking for 23 FB in return for lending 20 now, then the kid's gonna have to lower his price, he'll only be able to get 23 FB, not 25. Likewise, if the kids who want to borrow FB can't afford any kind of interest payment, and the kids who want to lend are fine with that because they think that FB will be worth more in the future anyway (there's a big cash auction coming up), then the parents can borrow a bunch of FB from their kids and spend it on things not chore-related, like playing chess with Mom or going fishing with Dad. This will bring those rates back up because the lender kids will want more FB to make up for the FB Mom and Dad borrowed and the borrower kids will be able to pay it because Mom and Dad spent more FB on them doing frivolous things. Under the new agreement, Mom and Dad can still "print" new Family Bucks, but only to buy already existing IOUs for FBs, either their own, or one of the kids, and only on the condition that those IOUs, once bought, are preserved so that they could be re-sold (not that they ever would be necessarily). But because this just swaps an FB-equivalent for another FB-equivalent, it doesn't do anything immediately to the amount of FB-equivalents out there among the kids. In the medium to long term, it allows for more FB IOUs to be created within the rules. In the short term, nothing changes.
This story is how federal budgets and sovereign currencies work in the real world. It should be fairly obvious that while there's lots of stuff going on, none of the accounting Mom and Dad are doing with regard to the FB system is anything like the accounting they do when figuring out their household budget in real dollars. But since this story is already going on too long, I want to briefly point out a few things before I turn it over to comments and questions.
First, all the rules and regulations Mom and Dad have agreed to in terms of paying FBs for chores, borrowing FBs from the kids, lending FBs to the kids, bidding using FBs for real cash, and printing new FBs are completely voluntary for Mom and Dad. At any time, they can stop and say, "You know what, this isn't working the way we intended, let's do something else." We made that point about half-way through, when Mom and Dad first started to realize that their system was going south, we mentioned that they'd probably just scrap it, assign the work to the kids and give them the cash they thought was appropriate. In politico-economic terms, this would amount to a conversion to a completely autocratic communism, which is no doubt something all of us would like to avoid. But it's also not Mom and Dad's only option, as the subsequent negotiations with the kids show. They can change or tweak any of these rules they like at any time. Moreover, none of these kids will ever make Mom and Dad "go broke" in FBs, even if both lose their real jobs and can no longer offer the cash auctions.
Second, while we sort of left off the story of how the kids are gonna relate to each other through FBs in the second part of the story, I want to note that things don't change much in favor of the youngest kid or to the detriment to the oldest. The fact that Mom and Dad borrow FBs from the eldest and spend them on the youngest benefits both eldest and youngest, and it benefits the eldest to a greater degree because Mom and Dad have to pay interest to him on the FBs they borrow from him. Veto power allows the eldest to forbid any FB spending by Mom and Dad which would give the youngest child a comparative advantage over the eldest. And insofar as the eldest can convince Mom and Dad to spend FB on him, he benefits doubly over FB spending on anyone else.
Finally, I want to point out some of the other options available to Mom and Dad. They can increase the amount of FB (or FB IOUs) they confiscate when they catch exchanges, and they can increase the amount of FB they withhold from winning chore bids. They can let the kids keep their FBs in a central lock-box, and make a rule that they have to have a certain amount of FBs in that lock-box depending on how many FBs they've lent out. They can beat that sh*t-faced eldest kid and send him to his room and take away all his FBs until he agrees to stop treating his brothers like crap. And perhaps most interestingly, they can guarantee FB-paying chores to every kid such that some chores are bid for, while others are assigned to the kids who didn't win any bids or who get the smallest amount of FB from the chores they won, or alternatively, simply grant a minimum FB allowance to every kid.
Well, I hope I haven't bored you to tears with this story. I've tried to inject this story with as many metaphors for our current state as made sense. You should be able to find the credit crisis, Quantitative Easing by the Federal Reserve Bank, the filibuster, monopoly suppliers and private bankers and hopefully a few other features represented herein. In the last paragraph, the options I've laid out correspond to raising taxes, increasing reserve requirements, stricter laws and criminal punishments for wayward bankers, and MMT's Job Guarantee or an Income Guarantee, respectively. Most likely, all of the options should be present in the real world to some degree.
So what do you think? I hope this story makes some sense of the mess we're in and the options we as a people have available to us.