What appears to be common sense in economics doesn’t make sound economic policy.

     Because the plus and minus accounting of family income and expenses does not reflect the way a national economy works. Each family manages its money, juggles income and expenses, and worries over credit. But that family’s wealth only increases if the national economy grows. That family’s market investments, usually in houses and stocks, will only increase in value if the nation’s domestic and international economic output increases. Their children will only have greater opportunity if the national economy expands.

    That uneven translation between balancing the check book on the family dinner table and balancing the components of national policy in the mahogany suites remains a sticking point that politicians and policy makers both exploit.

    The important difference between the family budget and the national economy is a concept called feedback. In the national economy, an act of government has consequences in very different ways than the private acts of a family.

    For example, if a family saves, it can cut its debt. It can accumulate savings. It can pay its bills. At the national level, if all families save, it will diminish buying and cut demand. When demand falls, workers are laid off, jobs are lost, and unemployment raises.

     So if one family saves, it can balance its budget. But if all families save, it will increase unemployment. Increasing family wealth by saving can cause the economy to lose jobs. (This is known as the thrift paradox.) That doesn’t seem to make sense, but it highlights the difference between the family ledger and the feedback effects within a national economy. It tells us why national policy can not be based on the decisions of the family checkbook.

Key Policy Questions

    The recession of 2009, originally linked to a housing bubble of inflated mortgages and unsecured mortgage derivatives has been more recently blamed on government spending and debt. This shift in focus has been the result of political goals. By messaging, the Republicans have shifted responsibility away from the banks, financial institutions that the government bailed out and blamed the government itself for the massive private sector failure, which lead to the collapse, sale, or bail out of major investment firms and banks such as Merrill Lynch, Lehman Brothers, Bank of America, the re-insurer AIG and Goldman, Sachs. Hundreds of small banks failed. Yet national policy discussions ignore both the private sector collapse and the giant consumer and private debt that hung over the economy and is silently growing larger.

    The question for national economy policy is how to review and weigh each of these elements of debt: private, household, non-financial, financial, public, in order to increase the nation’s total purchases and economic output.

For example, private household debt equals almost 100% of the US GDP (the US gross domestic product).  In comparison, the federal budget deficit last year (2010) equaled 9.9% of GDP.

 According to CIA statistical profile, the US ranks 38th out of 128 countries in its share of GDP to public debt. Total Federal debt is $9-10 trillion while US corporate debt is at least $29 trillion. (Failing to increase the debt ceiling would have actually moved money into US Treasuries, and have a negative effect on corporate debt, both interest rates and availabity.)

 Overall US debt, public and private, for all levels of government, households, and corporations, stands at $50+ trillion, with federal debt accounting for only $9.9 trillion.

 Yet the question dominating the public discussion is paying down the national debt and cutting annual government spending.

Why?