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Families also run deficits

The common analogy of household budgeting to federal budgeting is fallacious — and not simply because you would most certainly alter your spending behavior if you could print money. It's also based on the erroneous assertion that households balance their budgets.

This, in fact, almost never happens.

Back in 2008, for example, I spent drastically more money than I earned and took on a level of debt that far exceeded my annual income. Why? Because I bought a condo.

But then I ran a budget surplus in 2009, 2010 and 2011 paying down the mortgage. 2012 was going along in the same way, but then in December I went way deeper into debt as my wife and I bought a larger place. My initial plan was to rent out the old place to earn additional income, but that turns out to be a big hassle and it looks like this week I'm going to sign on a deal to sell the old one. So 2012 will be a giant deficit year, but 2013 will register a huge surplus.

That is what household budgeting looks like. Huge debt spikes as people go to school or buy homes, followed by years of surpluses to pay those debts down. Now note that it's not that an accurate view of household budgeting makes it look similar to federal budgeting.

Household budgeting is much more chaotic than federal budgeting, because the federal government doesn't normally have major life cycle events comparable to going to college or buying a house or having a baby. But the point is that households — like business and everything else in life — regularly tap credit and debt markets and are expected to pay attention to things like market interest rates when deciding on how much money to borrow and for what reason.

Matthew Yglesias has written two books, "Heads in the Sand," and "The Rent Is Too Damn High."

© 2013 Slate

Families also run deficits 03/12/13 [Last modified: Tuesday, March 12, 2013 4:43pm]
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