Thursday, September 23, 2010

Why the government is not a household, by Nick Clegg (aged 43¾)

He wheeled out Thatcher’s old canard in his conference speech:

It's the same as a family with earnings of £26,000 a year who are spending £32,000 a year. Even though they're already £40,000 in debt. Imagine if that was you. You'd be crippled by the interest payments. You'd set yourself a budget. And you'd try to spend less. That is what this government is doing.

But wait a minute. Let’s take him seriously and imagine exactly that situation.

Would you think to yourself: ‘Yikes! We’re spending about a quarter more than we’re earning and the loan interest payments are mounting up! How can we deal with this debt crisis? Well, here’s the solution: next year, we’ll spend 20% more than we earn. The year after, we’ll overspend by 14%. Then by 9% and then by 5%, and so in 2016 we’ll only be spending 3% more than we earn. That’ll sort us out!’

No, you wouldn’t think that. You’d act a lot more urgently.

The above (as if you couldn’t see this coming) is the government’s timetable for deficit reduction. Their actions prove that they don’t for a minute believe their own rhetoric.

So, intuitively compelling as the analogy is, the government’s finances are nothing like those of a household. Or else it’s a pretty funny kind of household:

  • It can borrow at well below commercial rates.
  • The worst thing at all likely to happen to it – in an unexpected once-in-a-century calamity – would be a 6% fall in its income (that was the change in government revenues over the two years from peak to trough).
  • It is in effect immortal, and has indefinitely long to service its debts, paying some off and rolling some over.
  • A lot of the money it’s borrowing is going to subsidise the family firm while business is slow, which helps to generate income.

Update: Patrick Osgood also deplores the use of this domestic analogy by deficit-phobes.


Tom H said...

The other thing is that Clegg's wrong even on his own terms. The family might not respond in the way he suggests - Clegg does not even consider the possibility that they might try to increase their income rather than reduce their costs (we don't know what their costs are, but it's possible that they're not easy to cut). If both adults aren't working already, the other one might try to get a job. Even if they both are, they might try to get better jobs, or even do some extra work on the side. If few jobs are available at an appropriate skill level, it might be worth investing in some training to make it easier to get a better job. It's also worth pointing out to a family in this situation that they may not be claiming all the benefits that they're entitled to - this is certainly worth investigating.

So Clegg could have said something like the following:

"It's the same as a family with earnings of £26,000 a year who are spending £32,000 a year. Even though they're already £40,000 in debt. Imagine if that was you. You'd be crippled by the interest payments. So you'd try and improve your situation. You could do it by keeping things as they are but making your kids go without. Or you could do something to make it better. Get a better job. Do some extra work on the side. Make sure you had the skills you need to compete, and if you don't, take advantage of the subsidised courses at your local college. Claim all the benefits you're entitled to. Take in a lodger. If the slow jobs market means that you can't find better paid work at the moment, try to get a loan to tide you over until the situation improves."

I don't know why he didn't say that.

Shuggy said...

I hate these analogies - they just serve to re-enforce the fallacy of composition. But if they insist: you can't pay off your debt unless you borrow enough money to put petrol in your car to get to work in order to earn money. Not as snappy as stuff about 'fixing the roof when the sun is shining' but it has the virtue of being true, in my view...