At the very least, this only applies when there are slack resources in the economy. Otherwise your prescription is like a perpetual motion machine where government can spend more and GDP will rise. At full employment increase in G has to mean a decrease in consumption or investment. Or run a deficit by borrowing from abroad. Which we'll have to pay back in the future. That form of investment may be wise, but for households, too, it's sometimes wise to borrow.

Excellent! The government-household budget analogy is one of the most wrong-headed and damaging ideas that I (as an Economics Professor) must unwind each semester. I use imagery to try to demonstrate that the private sector's financial position actually improves when the public sector's deficit increases. Check out the teeter-totter analogy I used to show what happens when the government tightens its belt: http://neweconomicperspectives.blogspot.com/2011/06/what-happens-when-government-tightens.html

-Stephanie Kelton
Twitter @deficitowl

In the same vein as your analogy (no pun intended) government finances are like a fluid system. Say, household plumbing. Government purchases and taxes serve to regulate aggregate demand, just as valves increase or decrease the rate at which water flows from the faucet. Taxes remove purchasing power from the economy while government spending adds to it. One is a leakage the other an injection.

Now, if we have a kitchen sink we can think of taxes as the drain and government purchases as the faucet. When governments run deficits, they will fill the sink faster than it will drain. Depending on the available capacity of the sink this may pose a problem, as the sink may overflow. Of course, if we keep our analogy tight, as the sink reaches the brim negative feedbacks engage and the faucet is constricted while the drain opens.

But, then at other times it may be the case that there are other leakages in the sink besides the drain, causing the sink to drain faster than we would otherwise expect. This is the point at which we crank the faucet as wide open as we can get it, and maybe pull in a house from outside.

Leaks are to sinks as cash hoarding is to the economy. So, with as many politicians and economists sticking to the household budget analogy, perhaps we ought to consult a plumber to close the output gap.

Lubricating oil for your car. At all times, they'll keep it running better than it would without it--but you still need to make basic repairs, maintenance, and upgrades.

When you haven't done any of those for a while--possibly due to diverting funds into other things you thought would be a better investment, possibly because you just don't have those funds--it will run worse. And some people will blame the oil, which gives you a chance to replace the crankshaft, the carburetor, or other pieces that are broken. Whether you take that chance is another question.

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