1st Day of Micro - Households and Governments are NOT the Same

Classes began this week and for what its worth, I have successfully completed my first week of class as a PhD student in economics. My choice of school, George Mason University, was primarily due to the desire to join the mainline of economics, not the mainstream (see Living Economics: Yesterday, Today, and Tomorrow by Peter J. Boettke for details on the difference).

Although I am excited about the opportunity, one area of economics where I feel my incoming views might contradict those of professors’ is related to modern money regimes. An example of this distinction is the contrasting beliefs that governments with fiat currencies, who sell debt in their own currency, cannot become insolvent versus the seemingly widespread belief that the US government will default if drastic actions to cut deficits/spending are not promptly taken. You can imagine my joy/relief, when during my first microeconomics class, Walter Williams used the following example to demonstrate the fallacy of analogy (approximate quote):

If a household has expenditures greater than their income they’ll go bankrupt, therefore if governments have expenditures greater than their income, the government will go bankrupt. Well, the latter is not necessarily true. Why? Because governments can always pay their debt, can’t they? They’ll just print money.

While I can’t/won’t claim that all GMU econ professors, Austrians, or Libertarians recognize this distinction (I’m not even sure which of the latter two, if either, Williams’ associates with) , I imagine the percentage that do is higher than many critics believe. For my part, I’m excited about the potential for further intersections between my classes and readings on modern money.

(Note: Unfortunately, for those who enjoy this blog, my priorities are shifting to the PhD program for the foreseeable future. I will try to update the blog as much as possible, but in doing so, will probably focus more posts on class readings, topics and discussions. Thank you to all my readers for support and to commenters for helping further my education.)