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“All models are wrong but some are useful.”

George E. P. Box

Now think of the economy like a household and think of government debt like your credit card. Use that model. Get it firmly in your head. Then judge every action of the government in the same way you’d judge running your household like that.

In this household model, of course, nobody ever explains how tax actually fits in, given that for a government it’s revenue. I suppose that it would be your investments and wages. Mm, so it would seem an obvious way of reducing debt would be to get a second job. Or raise taxes if we’re using this model.

Of course, ignore your mortgage. Or for the purposes of this. If you’ve taken out a mortgage, image that it’s on your credit card. The same if you have a car loan. If any of your kids are considering going to university, consider that HECS debt as being on the credit card too.

Good God! You are in a mess, aren’t you? Better stop spending money. Don’t, whatever you do, call a tradesman to fix something or make improvements to your property. That’s just saddling your kids with more debt. They can have the hot water fixed when they have children of their own.

I suspect there was a lot of this simplistic thinking behind Tony Abbott, when he announced at the World Economic Forum:

“No country has ever taxed or subsidised its way to prosperity. You don’t address debt and deficit with yet more debt and deficit.

“And profit is not a dirty word, because success in business is something to be proud of.”

When he talks about profit, is he suggesting that governments should be making a profit? Remember that a budget surplus means that they take more in revenue than they give back in services. Sometimes this will be necessary for the health of the economy, but should a government always be planning to run surpluses?

We also heard that Labor had messed up by trying to spend its way out the GFC:

“Well, the reason for spending soon passed but the spending didn’t stop, because when it comes to spending, governments can be like addicts in search of a fix.”

There’s an assumption in there that stimulating the economy in a time of crisis is the only reason for spending. Sometimes spending on things will be worthwhile in the long run. For example, we spend far more per capita on education than some of the poorer African countries. Is Mr Abbott suggesting that they wouldn’t eventually improve their economic situation by spending more on education? Or that well-targeted subsidies haven’t helped certain businesses in their early phase?

Well, I look forward to his removal of all the subsidies to the fossil fuel industry.

No, we need that simple model of the household. Keep government out of the way, keep taxes low and business will prosper. And, if particular businesses don’t, well that’s capitalism.

We need to remove all borders and allow free trade. Except when it comes to people smugglers, then we need stronger borders. What’s so bad about people smugglers? They’re just profiting from human misery. I thought profit wasn’t a dirty word! That’s only when companies are engaged in legitimate enterprises. Like the AWB in Iraq, or ANz in Cambodia?

Yep, let’s not think too deeply about economics. Otherwise I might be forced to point out that all the companies Mr Abbott praises in Davos have a much higher debt to asset ratio than the Australian Government.

But, just as it’s a mistake to think of the government as a household, it would be a mistake to try and model a government on a coorporation. I remember the quote from George W. Bush.

“When I’m president, I plan to run the government like a CEO runs a country. Ken Lay and Enron are a model of how I’ll do that.”

I leave the reader to decide how closely Bush came to achieving his aim.

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