One big (happy?) family…

Brad Plumer at Wonkblog has a run-down of the latest ridiculous government-spending analogy from the Heritage foundation: Heritage wants the us to think about government spending as if the government were a family!

Ohhhhh BIG SCARY PILES OF MONEY!!! Obama must be a socialist (especially given how much he has run up the deficit!)

Ok, so how does Plumer respond? Well, he notes all of the usual objections to this sort of ridiculous analogy–the US government primarily spends money on social insurance and national defense; two things that the government does much better (and more cheaply) than individuals, because they are subject to market failures like adverse selection and they are prone to under-funding because they are public goods. Ok, what else? Plumer notes that the US government has a printing press! And that the national debt is puny compared to the collective wealth of the US! And that most of the debt we’ve run up is held internally! And the US government is eternal (theoretically), whereas families need to pay back debt within their lifetime! All very good points, and all should serve to make the case that the US government is nothing like a family.

However, Plumer fails to make what I think is the most fundamental case against the ‘households need to tighten their belt, and so should the government’ argument: sometimes, it is advantageous for a family to go into debt:

Take an individual that just graduated high school. Let’s say this person, just after graduation, gets married and with his/her spouse takes out a mortgage and buys a house (ok, I know that no one gets married right after high school anymore but bear with me for the analogy). To use Heritage’s analogy, let’s say that their mortgage debt is 312000. Now, both the husband and wife are employed, and, together, can just scrounge enough money together every month to cover the cost of the mortgage, with no savings left over for emergencies, their (future) children’s college, etc. Now, let’s say our individual decides to go to college. Unfortunately, his/her spouse cannot afford to cover both the cost of the mortgage and the cost of education, so the couple takes out student loans to cover the cost of college (again, using the example above, at 12000 per year). Thus, for 4 years, the family has 312000 worth of mortgage debt, and is adding to that debt level with college loans.

Here is the kicker, though: with a college degree, our individual will gain, on average, $500,000 over the course of his/her lifetime. This is more than enough to not only pay off the debt from school, but to allow the couple to more quickly pay off their mortgage, save money for their children’s future education, etc. Thus, in the short term, taking on more debt to invest in future (income) growth proved advantageous to the long run fiscal health of the family.

Why wouldn’t the same analogy apply to US government investment? ESPECIALLY when that investment can be financed at negative interest rates! We’ve wasted a huge opportunity to invest in future American economic growth using extraordinarily low-cost financing over the past several years; the sad part is, even people that (mistakenly) believe the US government operates like a family should be able to buy that logic. Too bad this sort of messaging doesn’t get more play in the media…

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