The household analogy is the claim that governments must manage their finances like a household: living within their means, balancing their budgets, and paying down debt before spending more. It is one of the most persistent myths in modern economics, and one of the most damaging.
First, a household is not a currency issuer. Households use money that they cannot create. Governments that issue their own currency, like t in the UK, create the money that the rest of the economy uses. When the UK government spends, it creates sterling; when it taxes, it withdraws sterling. A household cannot do this. Treating the two as equivalent confuses fundamentally different institutions.
Second, households must earn before they spend; governments spend so that others can earn. Public spending creates income for households and businesses. Taxes are then paid out of that income. The sequence is reversed. If governments try to behave like households and cut spending during downturns, they reduce national income and deepen recessions.
Third, households cannot stabilise the economy. Governments must. When private demand collapses, only the public sector can maintain employment, invest in infrastructure, and sustain essential services. The household analogy denies this responsibility and justifies austerity, even when that austerity is economically destructive and socially unjust.
Fourth, the analogy hides sectoral balances. If the government runs a surplus, someone else must run a deficit. Usually, that means households or businesses must borrow more. This is unsustainable. Government deficits are often simply the mirror image of private saving. Ignoring this accounting reality creates policy errors that we then blame on individuals.
Fifth, the household analogy is political rhetoric disguised as common sense. It is used to frighten voters into accepting cuts to public services, attacks on welfare, and underinvestment in the future. It shifts attention away from real constraints, which are labour availability, resources, and environmental limits, and onto false financial ones.
Finally, abandoning the household analogy does not mean governments can spend without limit. The real constraint on public spending is inflation arising from resource shortages, not an imaginary household-style budget. Responsible fiscal policy, therefore, requires planning, taxation to manage demand, and investment that maintains the five forms of capital:
- financial,
- physical,
- environmental,
- human, and
- social.
The household analogy survives because it is simple and emotionally persuasive. But it is wrong. If we want an economy that delivers care, security, and sustainability, we must stop pretending that a currency-issuing government is just another family with a credit card. It is not, and policy based on that myth will always fail.
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Might the household analogy/lie also survive because it benefits the powerful greedy/ignorant in politics, main stream media, the financial sector etc. plus the ill-educated/mis-educated 97% of the population?
A good, and much needed, glossary entry. Thanks. đŸ™‚
I wonder whether it would be helpful, rather than saying “The real constraint on public spending is inflation arising from resource shortages” to reverse this. That is, to start by saying that government action is only limited by real resources. But, if governments try to do more, causing resource shortages, they cause inflation.
You have, of course, said these facts. So why do I suggest reversing the order?
To me, resources first ordering seems the logical, causative, order. “Anything we can actually do, we can afford”. It’s only after that there is any risk of inflation. I think this is easier to understand. For example, it makes it clear that we don’t need, economically, to have student loans because, obviously, the country is able educate all these students. Furthermore resources first highlights that, at present, the government is failing woefully to do as much as it could.
Focusing on inflation first seems, a bit, to be pandering to the household analogy. I’d like the MMT argument to be more proactive, rather than reacting to neoliberal criticism. I think resources first does that.
It’s just a thought on an excellent post.
Noted, and I will muse on this, but I think you are right.
The household analogy is so bad it needs to be called the ‘household apology’ – a pathetic excuse not to do the right thing by the people who have given you the power to help them which you have reneged on.
Are you listening, Keir?
This for a tweet –
The household analogy is the most heinous ‘zombie lie’ in economics
because it takes micro rules (household scarcity)
and applies them to a macro reality (currency issuer).
It was killed in 1971 when the world left the gold standard,
yet it still shambles through every budget debate to manufacture austerity
& kill public policy.
*
Thanks
You suggest that households are characterised by living within their means, balancing their budgets, and paying down debt before spending more.
I don’t know any successful households that do that year-to-year. There’s a lot of good anecdotes that support the lifetime income hypothesis, but I’ve never seen an annual income hypothesis for a successful household. If you’d care to define the terms of the theory then it would be an interesting one to test.
I’m not suggesting that is what households do. I am saying that is what right wing theorists claim they must do.
“…tax doesn’t fund public spending…”
James Wright
The Canary
https://www.thecanary.co/trending/2026/02/14/bbc-audience-applaud-ellie-chowns/
Little by little, one pundit at a time…
Indeed….