Monday, March 12, 2018

Roger Farmer — The Household Fallacy

My new working paper, joint with Pawel Zabczyk, is out now as an NBER working paper, a CEPR discussion paper and a NIESR discussion paper. Here is the abstract:

We refer to the idea that government must ‘tighten its belt’ as a necessary policy response to higher indebtedness as the household fallacy. We provide a reason to be skeptical of this claim that holds even if the economy always operates at full employment and all markets clear. Our argument rests on the fact that, in an overlapping-generations (OLG) model, changes in government debt cause changes in the real interest rate that redistribute the burden of repayment across generations. We do not rely on the assumption that the equilibrium is dynamically inefficient, and our argument holds in a version of the OLG model where the real interest rate is always positive....
When I saw the title I thought he got it. Not!

The real household fallacy is equating the currency issuer with users of the currency.

Roger Farmer's Economic Window
The Household Fallacy
Roger Farmer | Distinguished Professor of Economics at UCLA


Noah Way said...

This is the primary argument that I use to expose the economic fallacies most people assume as factually true.

When you are the issuer of currency you can never run out.

Ralph Musgrave said...

Looks like Roger Farmer is catching up with MMT. Wait another three centuries and Kenneth Rogoff might catch up as well....:-)

André said...

"When you are the issuer of currency you can never run out"

Unfortunately people than immediately say: "but if the government spends more than it earns, there will be inflation".

And then there is nothing, nothing that you can say that will change their minds, because they have been brainwashed their entire lifes...

Tom Hickey said...

Tell them they should clue in the Fed.

In what has been the most stunning admission by Janet Yellen so far during her press conference, the Fed Chair said that "we don't fully understand inflation" and added that the "shortfall of inflation this year is more of a mystery."