A country isn't equal to a household

The European debt crisis is still at large. There are still attempts of finding a solution for this problem. It seems that everything that was done until now to solve this is not enough. The wonderful thing about this situation is that suddenly everyone knows everything about debt and everyone has their own version of a solution. The most popular opinion is the one which compares a country to a household. The supporters of this idea say something like this: I don't spend more than I earn so I don't have the need to borrow money. So the countries should not borrow money and they should not have debt because they act the same as an individual but on a larger scale...

This kind of thinking is wrong in many ways. First of all even individuals take loans without a problem. There is a problem when the individual can't give back the money which is natural but even then there are many things that can be done. For example he can spend less or sign an agreement with the loan giver for a more flexible time frame in order to find the money or find another loan (stupid I agree with that). A state acts similarly on a situation like that.

There are some main differences though .Firstly governments get the money for their expenses mainly from taxes. Taxes can be raised to get more income. So this seems like a nice solution. Just let the taxes rise and the income will flow. Economic theory disagrees. After a certain point more taxes doesn't equate more income. This can be seen on the Laffer curve.

As you can see the top of the curve represents the maximum income from taxes. More taxes after that point means less income .The difference should be obvious after this. An individual can find more income by getting more jobs or whatever while a country's income is limited by that point.

The other main difference is that a nation can just print more money in order to pay their dept. This is a very good way to repay debt bet it comes with the cost of inflation. Nevertheless it is a very good way for a country to bail out of the debt by ignoring that cost. What happens though when someone else prints the money you use? I guess we see that now. The nations involved in this crisis can't use this measure because they share their currency with the other countries which use the Euro.

The conclusion is that you can't compare the two. By two I mean a household with a nation.Many countries have debt without a problem because let's face it the current economic system is made in favor of making debt to promote economic growth. The earning equal to spending thing is a thing of the past.