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September 14, 2011

Government finances are like...

By Cindy Ivanac-Lillig

In speaking about the financial crisis and how it is different than other types of crises, I have often invoked the metaphor of the human body. Banking may be like the circulatory system in our body. The organs may all be in great shape but if blood isn't flowing, everything suffers.

Similarly, many have invoked the metaphor of the household when speaking about the government and its finances. The government should behave like any responsible household. If a household has to live within its means, than why shouldn't the government? The problem with this is that although it is simple and memorable, it is not instructive. When a household spends less given the same level of income, it has improved its financial situation. When the government spends less in our current economic environment, it may mean that it will take in less income as well. Government spending increases the purchases of goods and services (economic activity), which increases tax revenue. Government finances are more like a dynamic function of both tax policy and the general health of the economy and less like a simple budget model from personal finance. There is balance of long term and short-term changes the government can make to improve the overall dynamic, but unfortunately this doesn't lend itself to a simple and memorable metaphor.

What do you think -- do you have any ideas? Government finances are like.....

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Posted by Cindy at 3:57 PM | Comments (43) | TrackBack