The economy, thank God, does not resemble my household budget.
Still, National will tell us they have the books in order because they’ve listened to our grandparents' voice of reason: ‘don’t spend more than you earn, and if you get into debt, spend less and save more. Batten down the hatches and wait for the recession to pass.’
Can we agree to ban the household budget metaphor from the election campaign? Probably not, because its a good story. It makes sense not to spend more than you earn, right? Who wouldn’t agree with that?
Except that if we ran the economy like a household budget we’d be a basket case.
I should stop spending when my outgoings exceed my income. But if a government stops spending in tough times, at the same time that I’m saving and business is struggling to invest, then demand falls and the end result is a vicious cycle of reduced growth, and therefore reduced savings.
Only governments have enough scale to keep or get a struggling economy going.
The ‘fallacy of composition’ holds that just because something is good for me and my family doesn’t make it good for the economy.
I like to buy a flat white every day, but because my income doesn’t stretch to a daily overpriced coffee, I’ve cut down to buying one flat white a week. That’s good for my budget because I save money. But if everybody stops buying coffee, the economy won’t get the benefits of me saving. Coffee shops would lay off staff. Those staff without jobs, living on savings or dole, cut back their spending and yet another business goes under.
Individuals may have no choice than to cut back.
Unlike households then, the way to increase growth across the whole economy is for governments to increase spending. But they should spend on the right stuff - Tough decisions on where to spend government money have to be made, whether its a Labour or a National led-government. Some activities grow the economy faster than others. Building schools grows the economy more than giving tax cuts to people who already have a lot of money and will save their tax cut in a recession, rather than spend it all. (People with less money, however, do spend everything, and therefore helping poor people is better for growth.)
Here’s another reason my household is not like a government at all. I don’t control the currency. Unlike governments, if I’m short of money my options are limited. I resort to my credit card, some borrow off family. Others go to loan sharks. Governments have more options. They can issue bonds in the form of low interest IOUs. (I definitely can’t issue an IOU to pay the electrician). Governments can raise taxes, or even print more money. Banks lend more or less simply on the basis of their predictions about what the government will do with interest rates.
In other words, in recessions, governments have multiple tools to use, and they need to move in the opposite direction to us. That is, they need to spend in the downturns. (Likewise, when the economy is doing well, governments should not splurge.)
The real test is not, who will balance the fictitious household budget, but what will each party spend on to make any recovery last longer than the election cycle.
Will the government support projects that will create new jobs and raise the incomes of most of us - not just a few of us? Or will they spend it on election bribes, hand outs to casinos, and nice-to-haves, like referendums on flags, cycle pathways - even selling existing assets. (Buying back assets also has to be weighed against creating new assets - it's better to start a bank than buy one back.)
Who will be honest enough to tell us that the economy is far more complex than a household budget, and tough decisions will need to be made?