You can't use family budgeting as a model for national budgeting

But perhaps the most important lesson conveyed by the great economist John Maynard Keynes is that this metaphor, when applied to the national economy, is fundamentally misleading: what is smart for the family is not smart for society as a whole. This idea, sometimes known as the paradox of thrift, is that when we all tighten our belts at once, the economy is so weakened that we end up failing to save more, and instead are all worse off. When that happens, some collective action — government stimulus — is needed…

I have previously argued in this column that a different approach, a “winter on the family farm” metaphor, should be stressed in bad times. When winter comes, and there aren’t the usual jobs in planting and harvesting, we should all keep busy anyway. We should demand that everyone help out with long-term projects on the farm, like fixing the barn, digging a well or building a fence. The farm requires that all members pay a sort of tax, by donating labor.

IN the early 1940s, William Salant, then a member of President Franklin D. Roosevelt’s White House staff, and Paul Samuelson, then of M.I.T., developed a “balanced-budget theorem.” It asserts that if a country raises taxes and expenditures by the same amount in a time of high unemployment, and if monetary policy is accommodating, the national income grows by exactly the amount of the tax, so that after-tax income is unchanged. In other words, the “balanced-budget multiplier” equals one. Like the farm in winter, the nation — through taxation — can require full employment, and does not need to go into debt to stimulate the economy.