Wednesday, July 27, 2011

That Families Borrow Money

It should go without saying that the analogy between managing the finances of a nation state and managing the finances of a family can only go so far, and not very far at that. I don't know of any families who possess the unique distinction and sole authority of printing the very same currency in which most of the world's assets are denominated, for example.

It should go without saying, but that assumes a world in which the blindingly obvious isn't regularly contradicted by putatively credible figures such as elected officials, highly-paid political pundits, and others. Even if one insists on the analogy, however, it quickly fails to support the shibboleth it is most frequently used to promote, namely, a legal requirement to balance budgets. Matt Yglesias:

In the course of making the case for such an amendment, [some dumbass] observes that “[e]very day families in southeastern Pennsylvania make tough decisions in order to live within their means.”

I’m sure that’s true. But even without being intimately familiar with conditions in southeastern Pennsylvania, I feel confident that every day families in southeastern Pennsylvania do things like get mortgages to buy a house. Certainly that’s what families do in the Washington, DC area. And as I recall from my college years, people often take out student loans to go to school. Certainly I have a mortgage. I’ve used my credit card. Over the long term, clearly, a household’s income has to equal its expenditures. But what kind of a family balances its budget on a year-to-year basis? How would anyone ever start a business in a world like that? It’s kind of amazing to me what can be passed off as common sense if you just repeat it enough.
Families borrow money all the time. So do individuals, and so do businesses big and small, and moreover they often do so without a fool-proof, guaranteed, finely detailed plan for paying back the money: a mortgage borrower expects, but cannot project with mortal certainty, that his income one, five, and ten years from now will be sufficient to cover the payments; a business owner expects, perhaps based on all kinds of solid research, that a expenses associated with developing a new product or opening a new franchise will pay off in a way that will balance the debt used to fund it.

Borrowing is not some kind of moral vice. Not just commerce, but capitalism itself would stop without it.

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