The Government-Household analogy refers to rhetoric in political economic discourse that compares the finances of a
federal government
A federation (also known as a federal state) is a political entity characterized by a union of partially self-governing provinces, states, or other regions under a central federal government (federalism). In a federation, the self-governin ...
to those of a
household
A household consists of two or more persons who live in the same dwelling. It may be of a single family or another type of person group. The household is the basic unit of analysis in many social, microeconomic and government models, and is im ...
. The analogy has frequently been made in debates about government debt, with
critics of government debt arguing that greater government debt is equivalent to a household taking on more debt.
The analogy has been characterized by
economist
An economist is a professional and practitioner in the social sciences, social science discipline of economics.
The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this ...
s as misleading and false, as the functions and constraints of governments and households are vastly dissimilar.
Differences include that governments can
print money,
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
s on government borrowing may be cheaper than individual borrowing,
governments can increase their budgets through
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
ation,
governments have indefinite planning horizons,
national debt may be held primarily domestically (the equivalent of household members owing each other),
governments typically have greater collateral for borrowing,
and contractions in government spending can cause or prolong
economic crises
A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
and increase the debt of the government.
For governments, the main risks of overspending may revolve around
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
rather than the size of the debt per se.
According to economist and Nobel laureate
William Vickrey
William Spencer Vickrey (21 June 1914 – 11 October 1996) was a Canadian-American professor of economics and Nobel Laureate. Vickrey was awarded the 1996 Nobel Memorial Prize in Economic Sciences with James Mirrlees for their research into the e ...
,
References
Political economy
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