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Roger Farmer — The Household Fallacy

Summary:
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

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Mike Norman writes Chris Dillow — The persistence of fiscal stupidity

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

Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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