Why the national budget is different than a household's

The nation's economy should be treated more like a farm in winter than a household: When it feels like we've hit a dry spell, the best thing to do is not to stop working, but to find things around the farm that need fixing.

The latest round of talks between President Obama and House Speaker John Boehner are being described as "frank." There are now just two and a half weeks until the fiscal cliff deadline -- and still no deal.

Now throughout the debate about the deficits and debt, you've probably heard a certain metaphor: One that compares the nation to a household. Well, that metaphor bothers one of the nation's leading economists, Robert Shiller of Yale University.

"I think that when we think about the nation, we think about the family," Shiller says. "And we think that if bad times come, we need to tighten our belt; cut back on our spending."

That metaphor doesn't work so well when it comes to the nation's economic tough times, he argues, because the income of a nation depends on spending.

"If we in one family cut back on our spending, it won't effect our income," he explains. "But if everybody cuts back on their spending, it will lower the national income."

So what's a better metaphor that policy makers could use in its place?

A winter on the farm, says Shiller.

"Sometimes cold, harsh times come on the farm. So people might sit around and not feel very active. But people love to work, within limits. So someone on the farm should say, 'Hey, let's go fix the barn now because there isn't something else to do.'"

To extend the metaphor out, Shiller thinks the government should be investing in infrastructure projects instead of trying to cut spending in a slow economic growth period -- like the one we're in now.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.
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LMAO! I was surprised when he made the comment about the farm. I immediately remembered the movie 'Being There' with Peter Sellers playing Chancey Gardner saying " As long as the roots are not severed, all is well. And all will be well in the garden." Then states "Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again."
Maybe there was more to the movie than I realized

Mr. Shiller totally misunderstands, or misrepresents, the metaphor.

It is not "if bad times come, we need to tighten our belt".

Rather it it is: Although we need to invest in the future, we can not permanently live beyond our means (either as households or as a nation). Which is of course what our government has been doing for the last several decades.

Ideally (whether we are a household or a government) we would pay down our debt in good times, so that we can borrow more (and spend more) in bad times. But politicians can not resist the temptation in good times to spend a surplus (without paying off what we already owe). So then when the bad times come, we are in no position to take on more debt (as Mr. Shiller rightly points out we should).

If our government had acted wisely in the past Mr. Shiller's arguments would make sense; since they have not acted wisely his arguments are irrelevant.

Mr. Hobson, I hope for the sake of objectivity that you will seek and report the opinion of a non-Keynesian regarding Mr. Shiller's metaphor of the farm. I am sure most listeners are as puzzled as I am by the fact that the metaphor demonstrates the importance of savings and not spending as it was intended. In real-life the farmer can only have the money to pay his farmhands to fix the barn if his earlier crops were profitable (he created wealth) and those profits were saved in order to have them ready to pay his employees in the winter when he is not producing. Mr. Shiller's metaphor works as intended, showing that spending is the significant factor, only if the farmer can print money at will (stealing wealth).

The farm is a better metaphor, but not in the way Mr. Shiller intended.

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