Benjamin Studebaker

“Government is like a business”. You’ve heard the metaphor before. In order to make it easier for a lay person to understand a complex political issue, pundits and politicians will try to relate it to something familiar, and one of the most frequently chosen metaphors is the business or household. Mitt Romney’s candidacy for US President is predicated on the notion that, because he has successfully run businesses, he can successfully run the government.

Typically, the metaphor goes something like this:

• Problem of Debt: You couldn’t carry a bunch of debt, so neither can the government, and if you were in a bunch of debt, you’d reduce spending, so government should too
• Problem of Profit: You have to make a profit or you go out of business and can’t provide income for yourself or your family, so government services have to make a profit too
• Problem of Stimulus: You can’t make money by spending money, so neither can the government–stimulus doesn’t work

These arguments are simplistic. They assume that businesses and families are like government financially without ever justifying that comparison, and they hope that you are desperate enough for the simple explanation to take the bait. Let’s go on an intellectual field trip and reveal what’s wrong with them.

Problem of Debt:

The best way to make it clear how different debt is for the government and how different debt is for businesses and families is to reverse the metaphor. If government debt is like individual debt, then individual debt is like government debt. So let’s imagine that you are an individual and you find yourself deeply in debt with say, student loans. You’re just like the government, right? You can do these things:

• Print your own money and use it to pay off your student loans
• Print your own money until the value of all the money in society falls and your student loans become smaller in value and easier to repay
• Force your boss to increase your salary so that you have more money to pay for your student loans

Doesn’t sound like your debt is much of a problem at all, doesn’t it? Oh wait a second, you can’t do any of those things. But you know what? The government can, and the government’s ability to deal with debt is consequently infinitely greater than yours. We call these policies:

• Quantitative Easing
• Inflation/Currency Devaluation
• Tax Increases

The Problem of Profit:

The best way to make it clear how government does not have the same responsibility to make a profit that business has is to look at who business is for and who government is for.

A business works for shareholders and provides services to customers, who are invariably not the same people.

The government works for citizens and provides services to citizens, who are invariably the same people.

Shareholders want profit, and customers want a quality product, but for the business, the latter is just a means to the former, because the shareholders are what’s important. They’re the reason the business exists, and they can pull their money out if they feel it is not making a sufficient profit. The only mandate a business has is to maximise profit.

Citizens want quality services, ideally at minimum cost, but both motivations come from the very same people, and so the government has a dual mandate. It is expected both to keep costs down and to provide quality services. When a politician argues that government should be run like a business and concern itself exclusively with ensuring that government services and programmes are profitable, the politician is ignoring the other half of the government’s mandate, which is to provide quality services.

The optimum government policy maximises quality of services while minimising costs. The optimum business policy maximises profits and only improves quality of services if doing so leads to higher profits.

The Problem of Stimulus: 

The best way to confront the accusation that government spending can never lead to better economic performance is to remember the following principle, often referred to by economist Paul Krugman:

Your income is my spending and my spending is your income.

When a business or a family is on hard times, it tries to cut costs, and doing so makes its financial situation better as it reduces its debt relative to the rest of the economy. However, when many or most families or businesses do this, it means that no one is spending money, and if no one is spending money, then no one can make any money.

Here’s an example:

Let’s say that you’re in a lot of debt and there’s been a big economic shock that reduces how much money your bank is willing to lend you, so you decide as an individual to cut your spending per month by 25% and save the extra. You’re building your savings, and your financial position has improved.

Now let’s say that everyone you know suddenly finds themselves in the same situation and cuts individual spending per month by 25%. Doesn’t everyone build savings, doesn’t everyone’s financial situation improve? Not exactly. All the businesses from which these individuals were purchasing their goods are now seeing a 25% sales reduction. This means that their sales are 25% lower than expected, and that 25% of their supply is in excess of demand. So they lay off 25% of their workforce, they stop using 25% of their productive capacity, and they certainly don’t invest in expanding their businesses.  For all of those businesses, that seems like a reasonable response, a response that would improve their financial situation individually. But now, the 25% of people who have been laid off all have to reduce their spending even further to stay afloat, say, a further 25% from their original total. Suddenly businesses are selling even less and having to lay off more workers and reduce their capacities further. Meanwhile, what money the new unemployed do have to spend comes from government programmes–welfare, food stamps, medicaid, and so on. In the meantime, the reduction in the amount that the unemployed are earning in income means a reduction in income taxes for the government, and the reduction in the amount that the businesses are selling means a reduction in sales taxes for the government. The government is having to spend more on social programmes for the poor, but is making less money in tax revenues, and so a deficit grows.

What can the government do to get out of this? It can spend money. If the government makes up the 25% spending that fell off in the first place, it prevents the businesses from having to lay off workers or reduce supply. This keeps income and sales tax revenues stable, and can result in a smaller deficit than would have happened if the government hadn’t spent money. Once private citizens have paid off their debts and feel comfortable spending again, the government can stop spending and find itself making up a smaller deficit in a stronger economic climate.

What does the logic of the “government is like a business” metaphor tell us to do? The precise opposite. It tells the government to respond to the growing deficit caused by falling tax revenues and higher social programme spending by cutting spending. This just takes more money out of the economy, reduces sales to businesses further, and results in more firings and more capacity reductions, which leads to…more social programme spending. Spending cuts can leave the government even worse off financially than it would otherwise be as a result.

This is why the “government is like a business” metaphor is so foolish–if you actually take it seriously and act as if it is true, you will not only fail to strengthen the government’s financial and economic position, you will weaken it substantially. The people advocating it are harming the very people they’ve been spewing this metaphor at in the hopes that they would buy into their misguided stone age economics–you, and everyone you know.