In this article Robert Shiller argues that we are locked into a metaphor that shapes how we think about economic policy. President Obama and Angela Merkel have used that metaphor to explain why government needs to cut spending when it experiences rising debt. A rational family would do the same thing to bring spending in line with income. The problem with that metaphor is that if every family would cut its spending at the same time we would less savings because national income would decline. This is called to paradox of thrift.
Shiller argues in favor of another metaphor that would encourage us in another direction. It is called the balanced budget theorem. If government spent the same amount on hiring new teachers, as it raised from increasing taxes on millionaires, the economy would grow and deficits would fall. The new teachers would spend their income and pay taxes. The millionaires would not have to cut their spending but they would save less. The IMF has argued in favor of the balanced budget theorem but it has not gone anywhere. We seem to be locked into the rational family metaphor. It is easier for most people to grasp than the better metaphor as a solution for our economic problems.
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