The Nation = Household analogy is bullshit because the household cannot issue its own currency or interest bearing bonds. A nation can borrow from its own citizens. And when it does, a nation guarantees the interest rate. It is typically low, but the risk of losing your investment for a wealthy country is almost nil - even if the economy is not doing well. This is important.
So let's consider a fictional household.
Rob worked hard and retired with a nice pension. But he and is wife Sue were used to being busy and after a couple of trips abroads started thinking about starting a business. Sue could make nifty widgets and Rob had all the skills necessary to turn widget-making into a business. But they needed seed money and didn't want to risk all of their own capital because they wanted their three kids, Jack, Sally, and Eve to inherit. So they decided they would borrow some money to finance their start up.
SCENARIO ONE
Rob borrowed money from The Bank. He borrowed $100,000 at 10% interest, payable monthly and based on the amount owed at the beginning of the year (real banks use more complex formulas).
In this scenario the business breaks even after 5 years and pays back the original loan in 10. The bank gets its $100,000 back and another $100,000 in interest. So not counting the profits from the business, the family have paid $100,000 to a bank in rent for the money they used. That money did not cost the bank anything to create and most of the admin is done automatically by computers. A staff member spent an hour on it at the start, but the rest was all handed by automated payments. So The Bank makes a healthy profit and pays out high salaries to executives and dividends to investors.
There is a net loss to the family of $100,000. This is what concerns people about national debt.
SCENARIO TWO
Same family except this time Rob borrows the money from his grown up kids. Jack has a high paying job and $25,000 in savings. Sally has $5,000, and Eve has $15,000. They get the balance of $55,000 from The Bank.
Rob and Sue agree to pay out the same interest rates to their kids so the over all sums are the same. In total $100,000 of interest is paid. But now some of it goes back to the kids - their capital is increased. As they are now investors, the kids also get a share of the profits as they go so again their capital increases as a result of the investment. And they all still stand to inherit the original nest egg.
However, they realise that the kids who invest least will benefit least. They know they need an employee so they offer Sally the job. Now Sally gets a little interest, some dividend, but she also gets wages paid for out of profits. So her share, boasted by investing her labour, goes up considerably compared to just a small investment of capital.
Discussion
Scenario One is Bullshit spread by Neoliberal psychopaths.
Scenario One has been extraordinary influential in public debate. This is what people think happens. The trouble is that it isn't. Politicians have sold this image because it justifies their economic liberalism agenda. This is the kind of libertarianism that aims to liberate business from the constraints of the state; to allow them to make unfettered profits with no concern over the broader consequences (such as environmental degradation or climate change).
One problem is that such businesses routinely resort to oppression and violence to achieve their profits. Unfettered such businesses would resort to using slave labour or sweatshops. They would not pay a wage on which anyone could live. Workers would have no protections. This is part of what is driving the right-wing Brexit project - the EU is protectionist and requires the UK to treat its workers better than Tories think they should be.
The other problem that we have seen is that businesses are like children. Without clear boundaries they will routinely operate in ways that are immoral. And even with clear boundaries they will constantly be testing them and pushing the envelope. Amazon are perhaps the best known example of this. They monitor productivity on a minute scale so that they get the maximum work from a worker, with no consideration for the impact this has on workers. They'd obviously much prefer to employ robots or slaves but the technology is not yet flexible enough to make it cost effective.
The prosecution of corruption in the finance industry has been devilishly complex and slow. Sometimes immoral practices, such as betting that tranches of high risk mortgages (wrongly been approved as safe investments) would fail to be repaid enmasse, turned out not to be illegal. But there was plenty of knowing illegal behaviour as well, such as manipulating interest international rates.
How can businesses that are run by adults behave with childlike immorality? This is a complex question but it does seem that people who do well in business tend to score highly on measures of psychopathy. In other words they lack interest in the lives of other people. It's not that they lack the ability to experience empathy. They do know how other people feel, but they just don't care. That thousands of people lost their life savings and their homes in the global financial crash does not illicit compassion or sympathy.
More recently we have seen how Big Oil use their vast wealth to lie about climate change and inhibit our ability to respond to it on a national level. Like Big Tobacco, the oil companies knew about the harm being caused by their product but continued to deny it. But more than this they spend billions each year lobbying politicians and trying to impede any attempt to prevent climate change.
The "childlike" analogy is quite generous. Business is a Lord of the Flies situation (although I rather think that the children involved were modelled on English public schoolboys and that is hardly universal). Indeed it might be better to see businesses as predatory psychopaths who have to be regulated, surveilled, and policed or they run amok. Not all of them, but enough that it could result in the enslavement or death of much of the population if we did not intervene.
So libertarianism when it comes to business is a very bad idea indeed. And these are the people who are telling us that the nation's finances are like our household finances.
Scenario Two is simplistic, but a better reflection of reality.
The second scenario, while still an over-simplification and probably a bit Pollyanna-ish, gives a better idea of what government borrowing is like. Japan, for example, has very high government debt, but it is almost entirely owed to Japanese citizens rather than to banks or foreign governments. In the blog post mentioned above, Lars Syll makes the point that in this case the Japanese people pay their taxes to pay off the debt to the Japanese people. What is the net effect for Japan? Syll argues that it is zero. I.e. that when Japanese pay tax it is going to the Japanese state which benefits Japanese people.
I don't think it is quite zero however, because there is some inequity built into this model. All citizens pay tax. With the prevalence of indirect taxes such as sales tax (VAT, GST, etc) everyone pays tax, even those who do not pay income tax. But not everyone has the surplus wealth required to buy government bonds. Those who invest more of their wealth in the government and get a greater share of the taxes than others. By this I mean that everyone benefits from things like roads and other national infrastructure that tax pays for. But bond holders get a personal share of the tax revenue as interest. There is a net transfer of wealth from the poor to the wealthy.
This is why the government needs to create jobs. In the scenario I made the parents employ their daughter to illustrate how to make things a bit fairer. By employing people the government helps to redistribute the benefits of national wealth to people who would not otherwise get it.
Some opponents of this model argue that government is inefficient. But in highly privatised Britain we've seen any number of cases of private sector inefficiency or outright incompetence. Our train system is a case in point. Fare structures are incomprehensible, train stock is deteriorating, and in some areas the service is appallingly bad. Delayed maintenance in order to make a profit after having underbid to get the contract has become a serious problem in many sectors. For example, the roads where I live are a mess and as a cyclist I really notice this!
One of the reasons that governments do things poorly is that they are chronically underfunded in regimes with low taxation. But that is a whole other story.
Conclusion
National debt is certainly not unimportant. But it is very far from being as important as Neoliberals make out. Their ideology calls for zero government interference in business. Government investing in the nation, financed by borrowing from the nation, is seen as interference. But it is moronic to think we can do without this.
In fact Keynes showed, and it is still true, that for best results the government and the private sector have to work in tandem. When there is a slump in the private sector, the government takes up the slack. And when the private sector is booming then the government can focus on paying down debt.
The major problem we have in the world today is private debt, both the private business sector and households. Earlier this month it was announced that household spending outstripped household income for the 9th quarter in a row.
The levels of private debt are leading to chronically slow demand which leads to low growth. Growth is becoming a controversial topic these days, but GDP growth can be drive by increased efficiency which might lead to lower emissions. And any transition to a zero or negative growth system will have to be funded somehow.
Attempts by government to reduce spending at this time are only making the problem worse. An example close to my heart is that cuts to welfare have a negative overall impact. People who rely on welfare tend to live hand to mouth. We spend all that we get in local shops. If you cut what we spend then that means less is spent in local shops. Local shops spend less at wholesalers. Wholesalers buy less from suppliers. Over all less tax is collected and it has a negative impact on the deficit.
Contrarily if you increase welfare spending it is all spent locally. The local shops do more business and pay more tax. They buy more from the wholesaler who also does better and pays more tax. And so on. Much of the welfare spend makes its way back to the government in taxes. But it also stimulates the economy by increasing demand. While the poor people on welfare might spend on small items, the shopkeepers and wholesalers buy bigger ticket items. It also creates jobs because the retail, wholesale, supplier chain is busier. More jobs means more tax revenue.
The big problem with high levels of private debt is that it leads to what Richard Koo calls a balance sheet recession. At some point the interest bill on the debt becomes intolerable. At that point, instead of using surplus income to buy luxuries, people start paying down debt instead. If they all do that around the same time then it sends demand plummeting and causes a recession - overall economic activity shrinks, workers are made redundant, tax revenues fall, and so on.
One of the dangers for the private sector is deflation - when wages and prices start to fall. When this happens the value of debt goes up. That is to say, if there is deflation when you are in debt, it is the same as taking on more debt.
In any case we need to change the tune on national debt. We need to banish the chequebook metaphor or the household budget metaphor. Although people easily understand this the analogy is false, the reasoning is false, and the outcome is confusion about what is needed.
National debt is like borrowing from your family when you know that you have plenty of cash coming in to pay them back. It's a good investment. The interest stays in the family. And the principle stays in the family.
