Does Personal Finance Help Us Understand National Economics?

by Joe Plemon on August 26, 2009

Alumnos en clases-Universidad de Navarra
Creative Commons License photo credit: Universidad de Navarra

I do a fair job of understanding personal finance, but the science of national economics seems to escape me. I therefore attempt to make some sense of macro-economics by making application of micro-economics. In other words, I ask myself, “What would happen if my wife and I did the same things with our personal finances that Congress does at the national level?

Am I saying that my analogy works? No, but it does seem to help. Admittedly there are huge holes in my logic that the economics academia could point out. You be the judge as we examine two of these economic realities: national debt and deficit budgets.

1. National Debt.

1. National Economics: The rationale for the ever increasing national debt is that we must continue to borrow (bailouts for rescuing businesses and stimulus bills for stimulating the economy.) The long term debt is justified in order to ease some short term problems.
2. Personal Finance analogy: My wife and I have trouble making our car payment so we borrow more money against our house, justifying the long term debt in order to ease a short term problem.

2. Deficit budget.

1. National Economics: Year after year Congress passes a deficit budget, which means they are budgeting to increase, not decrease the national debt. Again, the long term debt is justified because Congress does not want to cut any current programs.
2. Personal Finance analogy: My wife and I, instead of trying to pay down our debt, plan our budget to increase it. We justify spending more than we make because we don’t want to lower our standard of living.

So, what do you think?

Are these personal finance analogies valid? I will leave that up to people smarter than me, but, because this column is about personal finance, this is what I do know: there is NO rationale for you to do personally what Congress is doing nationally. If you do, you had better be finding a good bankruptcy attorney.

Readers: I covet your thoughts. If my analogy is way off, please let me know and why. If it makes sense, let me know what part of it makes sense to you.

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{ 3 comments… read them below or add one }

Matt Jabs August 28, 2009 at 2:20 am

I choose to view economics as the actually are… simple. Economists of today have one major flaw – they only consider short-term effects of their policy changes.

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. ~ Henry Hazlitt

It is the fallacy of overlooking secondary consequences.

As for your analogies… to me they are accurate smaller representations of much grander problems.

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Joe Plemon August 28, 2009 at 10:19 am

Matt,

I have been reading “Applied Economics…Thinking Beyond Stage One” by Thomas Sowell. His basis for the book is exactly what you said: economists (and particularly politicians) do not think long range. According to Sowell, they need to think “Beyond Stage One”, a phrase you worded as “secondary consequences”.

Thank you for your insightful comment.

Reply

Matt Jabs September 14, 2009 at 8:46 pm

If you haven’t read “Economics in One Lesson” by Henry Hazlitt then I strongly urge you to do so. That is the premise of the entire book. 🙂

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