Friday, 12 November 2010

financial crisis fallacy

Regarding the financial crisis, I have often heard this analogy made to support the policy of slashing public spending:

****It is like any household that has to balance its budget: it is unsustainable for your household debt to be more than 100% of the household’s income; therefore, the family must cut down on luxuries.****

But, if anything, this analogy (assuming it’s even appropriate) would, contrary to what’s intended, seem to boost the case for +increasing+ public spending. I’ll explain …

Household debt is typically so massive as to dwarf income – an illustration: for any ordinary household, you could have income of £50K/year and a mortgage of £500K over 25 years. That means that, for a decade or so, the debt/income ratio could be in the range 1000% to 500% (say).

Then, by the logic of the public-spending-slashers, the parents should say, ‘We should not send any children to university. The money that would have been spent on tuition fees and maintenance should, instead, go to reducing the debt. Also, we should buy the least amount of, and cheapest, clothes and food possible – again, to help reduce the debt. Also, we should consider +selling+ the house and find a tiny flat instead – again, to help reduce the debt.’

But that’s plainly nonsense. A good house, good education, good clothes and food are crucial investments to a better, more productive future. Of course it’s better if the family had no mortgage debt burden, but the proposed measures are simply irrational panic that ignores the long-term, bigger picture: people in squalid overcrowded accommodation, with poor diet and poor education, are in no position to cultivate their skills, improve their lot and contribute to the economy.

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