Deficits and Institutional Theorizing about Households and the State

By Todorova, Zdravka | Journal of Economic Issues, June 2007 | Go to article overview

Deficits and Institutional Theorizing about Households and the State


Todorova, Zdravka, Journal of Economic Issues


In a pecuniary economy, households' spending is limited by the stock of state money and the flow of income received in the form of state money. Thus, households are subject to liquidity constraint as they incur debts in the established unit of account, and consequently need to obtain the widely accepted medium of exchange (Wray 1998; Bell 2001). Even when households' borrowing is unlimited, there is liquidity constraint to the extent that various interest rates and fees are administered by banks and business enterprises upon different households. Consequently, households are concerned with sound finance--or balancing their budgets at some point (albeit not at all times). The state's spending, on the other hand, is not limited by a stock of money, since the state spends by issuing its own IOU (Knapp 1924). Thus, there is no instrumental reason why a sovereign state should follow "sound finance" (Lerner 1943; 1947; Wray 1998).

The idea that a sovereign government or nation faces financial burden due to federal deficits is based on a state-household budget analogy, according to which, in much the same way a household goes bankrupt if its debt continuously exceeds its income flow, continuous government deficits are also unsustainable. The view of government "sound finance" holds that there is some "prudent" government deficit-to-GDP ratio in the same fashion that there are sensible household debt-to-earnings ratios that are used in reasonable lending practices. Under such an analogy, in the same manner that households have a time line for repaying their debts (even if they are rolled over) the state eventually will have to face the retirement of government debt. Thus, according to this view continuous government deficits are wasteful and constitute a "burden" for future generations.

The household-state analogy does not differentiate households and the state as distinct institutions with specific characteristics, powers and liabilities. An Institutionalist discussion of this analogy with reference to household and government deficits would reveal some questions of importance for theorizing about households and the state as institutions in a pecuniary culture.

Government Deficits and Households' Financial Positions

The state-household deficit analogy is not merely a rhetorical device and an example of fallacy of composition; it is a habit of thought. The analogy enters the process of valuation in policy analysis and formulation, and is engrained in common everyday "understanding" of public finance and the relation between state and households. The following main issues emerge as a result of the household-state analogy with respect to deficits. First, the special place of the state as a monopoly issuer of money is ignored, which obscures the importance of households' place at the bottom of the "debt pyramid" (Bell 2001). In addition, the way in which the state deficit spends and "prints" money is misconstrued (Wray 1998; Bell 2000). Furthermore, the household-state debt analogy obscures the effect of government deficit on the household sector, as well as its role in generating household sector net savings. We are going to focus on the last point.

The government budget deficit offsets the private (business and households) sector's surplus. This means that the private sector as a whole can save only when the government runs a deficit. Alternatively, while it is true that one household can spend less than its income, and thus can save, another would have to go in debt. Thus, the government deficit represents private sector saving. The private sector saving equals the sum of the government sector deficits, which equals the outstanding government debt (assuming a balanced foreign sector). In such a case, if the government runs a surplus, the private sector will be deficit spending and reducing its net financial wealth at the aggregate level (although some households may still be able to save) (Wray 2006; Galbraith 2006). …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Deficits and Institutional Theorizing about Households and the State
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.