I published a new video this evening. This is part of an experiment, as it seems that both YouTube and TikTok viewers prefer videos produced at this time of day.
In this video, I argue that politicians keep claiming that the government must run its affairs just like a household, but absolutely nothing could be further from the truth or more harmful for our economy.
The audio version is available here:
The transcript is:
The government is nothing like a household.
Someone should be telling Rachel Reeves that because she goes around talking about economics as if the government's books were like those of her mother when she used to sit at her kitchen table checking the bank statement to see what she had spent her cash on.
Now I'm not saying the government should not check what it spent its cash on, but there is no similarity between the financial position of the government and that of the Reeves' household in which Rachel was brought up. Why? Well, because the government is fundamentally different, in economic terms, from a household.
And there's a very good reason for that. A household will never be able to create its own money, which somebody will accept. You can try if you like. You can write out IOUs to whoever you want, promising to pay £5, £10, £10,000, if you wish, sometime in the future. But I bet you won't be able to pass them off in the local Tesco's.
No, but the government can do that. The government is perfectly able to create money at will because it has the Bank of England. And the government is able to say that the money it creates at the Bank of England is legal tender - in other words, the only form of exchange which is legally acceptable in fulfilment of contracts in this country.
What is more, the government can say you must pay taxes and you must pay them using its legal tender. So, the government is in a totally different position from any household because it can quite literally create the money that it needs to spend. And what is more, it can force those people it spends it with to pay it back to it.
So, the government is nothing like a household precisely because it has this legal power to create money and to tax.
Now let's also talk about other reasons why the government is different from a household. A household can externalize its costs. For example, in a household where there are three children and costs are getting tight and one of those children is able to be pushed out of the door and be told to go on their own way, the householder could do that.
The household can say to their children, “Leave now. Make your own way. We don't want you here anymore. We can't afford to support you.” And if it does, it's externalised its costs. It's passed the burden of maintaining that child onto the child itself. And that's a possibility that the household has.
But if the government decides to make people unemployed, for example, they still exist. They're still there. In fact, the government's now got to maintain them, when previously they were in employment, and it didn't have to maintain them, and the people contributed instead.
So, the government isn't able to push its costs off its income statement, because, in fact, trying to do so, trying to make resources unemployed, or trying to push them beyond its own boundaries still means those people will always be there. So, the government has to think differently from a household, because a household can cut its costs, or externalise its costs, and make a saving. But if the government also tries to save costs by doing austerity, what it then does is fail to create the money which becomes somebody else's income. And so, it cuts the national income by trying to save its own costs. So, it fails to deliver its objective of trying to balance its books by doing what a household could do.
Households and governments are, then, quite different, therefore. Households don't have their own banks. Households can externalize their costs, households can cut their costs and make a saving, and in broad terms, the government can't do any of those things.
So, and in broad terms, the government is in the opposite position in every case. It has its own bank, it can't externalize its costs, and if it cuts its spending to try to balance its books, it cuts its income at the same time. So, governments have to think in a fundamentally different way to households.
So, if a politician says, and they very often do, that the government is like a household and has to exercise the same caution, they're talking utter nonsense to you.
What they're revealing is that they don't understand how government finances work and that's pretty worrying if they want to be in charge of them, as Rachel Reeves is.
They also reveal that they have never thought about the difference between a household and the government. And that's also worrying because their economic education should have reached that stage.
Or, alternatively what they're revealing is their ignorance.
Whatever it is, they're misleading you.
And that's deeply worrying.
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Excellent Video! I watched it on your YouTube channel and read all the YouTube comments.
You are gaining a great YouTube following: 387 views in less than hour.
Thanks
The actual number will be higher – it takes about six hours for the site reported number to catch up with the data we get.
But as a mechanism for getting messages out, this is working.
Releasing them later……………..clever.
I’m happy to say for once ‘The cunning of reason’!!! (rather than the cunning of unreason – my oft repeated quote from a book I once read).
You’re doing a lot of hard work.
Admirable.
It isn’t working, yet…..
Well, that is what being heterodox is all about if I understand things correctly.
Has she forgotten what we should have learned after the depression from 1929 onwards. Back then the government cut spending and instigated public servants wage cuts. The slump continued in the 1930’s when more spending might have avoided he worst of it according to many economists. Surely Rachel Reeves knows all about this so what is her real strategy?
Recession? That’s what her actions say. I ignore the words.
The Government should do what any good housewife would do if money was short—look at their accounts and see what was wrong. Don’t be scared of the high language of economists and Cabinet ministers, but think of politics at our own household level. Margaret Thatcher.
and to ruin people’s evenings …
https://www.facebook.com/watch/?v=1048067852070940
“No such thing as government money.” She made her civil servants read Hayek. It is not recorded what they thought-I think. Maybe it is?
It all stems from then.
I get MMT but I’m amazed and somewhat befuddled why, and I include many of my well educated friends, so many don’t, and just accept without question the household analogy. Talking it through with my brother, he reminded me of our Sociology and Psychology degree studies in the very early seventies – Conditioning – and how hard it is to crack
Agreed
I explained it to a very dogmatic colleague at the end of term. After some discussion, the lights came on,, and he said ‘that makes sense’. I directed him to this website.
Thanks
This, I suspect, is largely why we have school and why attendance is so rigorously enforced. Remember Tacitus explaining how schooling worked in his Life of Agricola; “The following winter passed without disturbance, and was employed in salutary measures. For, to accustom to rest and repose through the charms of luxury a population scattered and barbarous and therefore inclined to war, Agricola gave private encouragement and public aid to the building of temples, courts of justice and dwelling-houses, praising the energetic, and reproving the indolent. Thus an honourable rivalry took the place of compulsion. He likewise provided a liberal education for the sons of the chiefs, and showed such a preference for the natural powers of the Britons over the industry of the Gauls that they who lately disdained the tongue of Rome now coveted its eloquence. Hence, too, a liking sprang up for our style of dress, and the “toga” became fashionable. Step by step they were led to things which dispose to vice, the lounge, the bath, the elegant banquet. All this in their ignorance, they called civilization, when it was but a part of their servitude.”
The process continues.
I picked up this quote from the big issue:
Surrey and Borders Partnership NHS Foundation Trust told EveryDoctor it was spending ten times as much on private mental health beds in 2024 as it had in 2019. Lancashire & South Cumbria NHS Foundation Trust’s spending jumped from £3.8m in 2019/20 to a staggering £40m in 2023/24. In Dorset, the mental health trust was spending just £800,000 on beds in 2019/20 but by 2023/24 this rose to £6.6m
So according to politicians of all ilk Government finances are like household finances. But clearly the way you spend those finances are not like how you would manage household finances.
They like to have their cake and eat it.
Great video, but how do you/we get this to Rachel Reeves, the PM and all Labour MPs?
She follows me on Twitter
Some other Labour MPs do
She may follow you, but does she listen to what you are saying? It doesn’t look like it so far.
I doubt she notices – but people will around her
A classic example of how a government can’t externalise its spending lies before us with the current rioting. If the scapegoating of others by individuals lacking critical thinking skills and driven by the effects of austerity policies implemented by dumb politicians continues then Scammer & Co can’t refuse to increase police and army numbers on the basis there’s no money available because of a so called black hole. It has to invest in the security and stability of society in the first instance and then also recognise it must also undertake government investment to reverse the effects of austerity driving the rioting. In simple terms Reeves’s blackhole argument if continued will undermine British society!
Am I being flippant to point out that the Uk should seek to borrow from China.?
Ths article from the Carnegie Endowment suggests China is accumulating cash quicker than they know what to do with it.
https://carnegieendowment.org/posts/2024/07/why-should-china-borrow-abroad?lang=en
Starmer and Reeves should grovel and ask for a good sum to fund new hospitals and public infrastructure.
It is not an option open to the average UK household.
But, we never need to borrow
Why do what is unnecessary? The government creates its own money
If the government creates money would that devalue the money in circulation
Did that happen in 2009?
Did it in 2020 for that reason?
Please make your case with evidence – because the BoE does not support that view.
She MUST understand. She claims otherwise because she thinks the truth will not be understood by voters.
Very patronizing….and deeply damaging.
I admire your endurance Richard, for how much longer have you got to state the obvious. Sadly everyone I know keeps referring to Government expenditure as if they were an household. How do they think growing economies operate if governments don’t provide the lubrication of money?
I wish I knew
For further reading, I can suggest:
Are Policy Analogies Persuasive? The Household Budget Analogy and Public Support for Austerity, SocArXiv, 2020
https://doi.org/10.31235/osf.io/7qa2b
The Government Is Not a Household: A Long-Term Perspective on a Bad Metaphor
https://scholarship.miami.edu/esploro/outputs/991031801621002976
Why government debt is not like household borrowing, The Guardian, Thu 13 Jun 2024
https://www.theguardian.com/business/article/2024/jun/13/why-government-debt-is-not-like-household-borrowing
The “Household Fallacy” fallacy, 2017
https://iea.org.uk/the-household-fallacy-fallacy/
A government is not a household, 2018
https://neweconomics.org/2018/10/a-government-is-not-a-household
Many thanks, Ian.
Quite a list Ian, but this one has me concerned
https://iea.org.uk/the-household-fallacy-fallacy/
I would go on to say that in talking to politicians about such matters when I volunteer for them or attend fundraisers, I find that no matter how the conversation goes, ultimately they are paralyzed by debt service. Consequently I suggest we go further by
1. proposing we stop paying interest on reserves and having central banks hold more government debt. Politicians can understand interest free debt through that change.
2. supporting Central Banker William White who supports a Lincoln Greenback approach in his 2023 paper.
https://en.wikipedia.org/wiki/William_White_(economist)
https://www.ineteconomics.org/uploads/papers/WP_210-White-Monetary-Policy.pdf
Well done Richard – another one the politicians need to watch!!!
BTW another difference is that household earners have a shorter lifespan, and eventually are not able to earn a wage. Governments continue to be a going concern that can continue to invest in people and physical capital productively.
Good point
There is no retirement by government
Richard should you be making distinctions about national and lower levels of government to anticipate questions on the differences in your theme depending on government?
I will try to do so in future
In a nutshell what ultimately do citizens do with politicians who believe a government can externalise its troubles? Consign them to the dustbin!
England as the UK maybe nothing like a household when it comes to finances but such a system is imposed on Scotland by England.
“So, if a politician says, and they very often do, that the government is like a household and has to exercise the same caution, they’re talking utter nonsense to you.” Scottish politicians aren’t talking nonsense when they point this out – quite the opposite.
Scotland is treated like a child who can’t be trusted with its pocket money. Probably the richest country of this Union of Unequals kept in poverty by the country next door, providing energy but paying the highest charges for it than any of the other countries, for example. To be made even poorer when the Winter Fuel allowance is removed and mitigating, each and every year, against the 2 child poverty cap and the bedroom tax to the tune of hundreds of millions of pounds from its fixed household budget.
Accepted
Richard has often pointed out that only countries issuing their own currency are not like households. Countries which use money issued by another country are not sovereign in this sense. Any country that uses dollars can’t isue its own money. Likewise countries in the euro. So Scotland, using pounds sterling, is in the same boat as many others. And if it becomes independent it must start issuing its own currency. Again, points Richard has made many times over, for many years
You could also argue, as I know you have elsewhere, that the Tories and now Labour are deliberately arguing we need to balance spending and tax so they can argue ‘we can’t afford increasing spending’ to justify their privatisation plans.
The really sad thing is that Reeves et al. don’t even do household economics right. Every home owner knows that if you have a small leak in your roof, you fix it straight away, even if you have to borrow to do it. Not doing so is really dumb and will leave you with much bigger problems later. Which is exactly the trap Reeves is falling into.
Heterodox economist Yuan Yang MP gave her maiden speech in the Commons last night. She said:
“While studying my master’s in economics, I realised how much economic debate had become detached from the real world around us. With fellow students, I set up Rethinking Economics.” https://x.com/rethinkecon/status/1820837902290501924
Rethinking Economics is a global network of students and organisers fighting for a new way of teaching and practising economics so that it truly helps us deal with the real-world challenges we all face today. https://www.rethinkeconomics.org/
She might be good news
Richard – you say:
“What they’re revealing is that they don’t understand how government finances work and that’s pretty worrying if they want to be in charge of them, as Rachel Reeves is.”
This has been going on for decades. Are there not civil servants in the Treasury who advise politicians of exactly how the economy really works?
They take the “Treasury view”, unchanged since 1929
How can we change this?
I wish I knew
I am working on it
This borders on if it doesn’t quite fall into being pathological. This means that they are unfit for the job they are supposed to be doing.
Government finances operate on a much larger scale and are influenced by complex economic policies, unlike household budgets. Understanding this difference is crucial for informed discussions on public spending and debt.
Surely that’s semantics if successive governments are ignoring the fact that the way the economy acts has changed. It’s extremely frustrating and one wonders if it’s legal!