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Deficits and Institutional Theorizing about Households and the State
Journal of Economic Issues
  • Zdravka Todorova, Wright State University - Main Campus
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In a pecuniary economy, households' spending is limited by the stock of state money and the flow of income received in the form of state money. Thus, households are subject to liquidity constraint as they incur debts in the established unit of account, and consequently need to obtain the widely accepted medium of exchange (Wray 1998; Bell 2001). Even when households' borrowing is unlimited, there is liquidity constraint to the extent that various interest rates and fees are administered by banks and business enterprises upon different households. Consequently, households are concerned with sound finance - or balancing their budgets at some point (albeit not at all times). The state's spending, on the other hand, is not limited by a stock of money, since the state spends by issuing its own IOU (Knapp 1924). Thus, there is no instrumental reason why a sovereign state should follow "sound finance" (Lerner 1943; 1947; Wray 1998). The idea that a sovereign government or nation faces financial burden due to federal deficits is based on a state-household budget analogy, according to which, in much the same way a household goes bankrupt if its debt continuously exceeds its income flow, continuous government deficits are also unsustainable. The view of government "sound finance" holds that there is some "prudent" government deficitto-GDP ratio in the same fashion that there are sensible household debt-to-earnings ratios that are used in reasonable lending practices. Under such an analogy, in the same manner that households have a time line for repaying their debts (even if they are rolled over) the state eventually will have to face the retirement of government debt. Thus, according to this view continuous government deficits are wasteful and constitute a "burden" for future generations. The household-state analogy does not differentiate households and the state as distinct institutions with specific characteristics, powers and liabilities. An Institutionalist discussion of this analogy with reference to household and government deficits would reveal some questions of importance for theorizing about households and the state as institutions in a pecuniary culture.

Citation Information
Zdravka Todorova. "Deficits and Institutional Theorizing about Households and the State" Journal of Economic Issues Vol. 41 Iss. 2 (2007) p. 575 - 582 ISSN: 0021-3624
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