A point that I’ve been trying to make but don’t have the time is the following: intuition about personal finance causes major mistakes when transferred to public finance.

There are a lot of examples but one of them is common and on public display right now: raking up lots of debt is an example of spending too much money or “living beyond your means”

There are several reasons why this is wrong but the one that causes the most confusion amongst the man on the street is not realizing your personal control over spending versus revenues is essentially the exact opposite of the governments control over spending versus revenues and that this is more or less by design.

For the man on the street its really hard to control your revenue. You can’t easily boost your salary by 30%. Even getting a second job entails such hardship that its rarely the first or even second resort of settled middle class Americans. College students and poorer folks get second jobs all the time, which ironically gives them better intuition about how federal budgets work than a typical middle class family.

On the other hand, most middle class families have a significant fraction of their income spent on “luxuries.”  I don’t mean diamonds and trips to the Caymans but things that one could in a literal since do with out.

You don’t actually have to eat meat to survive. You don’t have to buy new clothes rather than used ones. You don’t need a new car, etc. In most places you could live – uncomfortably but still live – without AC and with very little heat. You could pack 4 people in 900 square foot apartment, rather than a 2000 sqft house. There are lots of ways to cut back that result in a lower standard of living but don’t really impact short-term your ability to function as a human being.

Meat, air conditioning, reliable heating, new clothes, newer cars, your own bedroom these are all niceties not necessities.

As such most middle class folks can cut back on their spending with relative ease. They probably won’t get sick, malnourished or injured from exposure as a result of spending cuts.

What this means is that if revenues are running lower than spending – a necessary condition for building up debt – the most obvious choice is to cut spending.  Therefore, as a rule of thumb people develop the notion that debt comes from living beyond your means.

In theory one could just as easily say that debt is caused by earning means below your standard of living. If you are in debt you need to make more money. And a significant number of working class people approach the world this way. They try to get overtime at their jobs, they moonlight somewhere else, they traffic in small scale flea market merchandise. The classic working class complaint about tough time stretches in personal finance is not having to cut back, its having to work double-shifts.

As a side note this another reason why recessions – and failure of labor markets to clear – is so damning for working class folks as compared to the middle class.

However, again for most middle class people its much easier to cut spending that to increase revenue so the saying goes the other way.

Now,to the government. The exact opposite is true. It is much easier for the government to raise revenue than to cut spending. Moreover, most of the movement in the deficit is tied to movements in revenue, not movements in spending.

Thus the exact same reasoning that leads you to associate debt and spending in your personal life should lead you to associate debt and revenue for the government.

Corporate finance has a structure somewhere in between, but it’s a common joke that some managers believe if we cut costs low enough that we can make money without selling any units. That’s just a way of poking fun at how such managers use rules of thumb from personal life in the the business world where they don’t apply.

None of this is to say that you might not have other reasons for preferring spending cuts to revenue cuts. It is simply to say the intuition that high debt means you’ve spent too much is wrong.