Someone sent this to me via e-mail, and I don’t know the original source. From the $38.5 trillion number, that seems to refer to the budget cut deal that averted a US government shutdown in April 2011. In any case, it does make the numbers much more easy to grasp.
Some stats about the US government:
- U.S. Tax revenue: $2,170,000,000,000
- Fed budget: $3,820,000,000,000
- New debt: $ 1,650,000,000,000
- National debt: $14,271,000,000,000
- Recent budget cuts: $ 38,500,000,000
Now, remove 8 zeroes and pretend it’s a household budget:
- Annual family income: $21,700
- Money the family spent: $38,200
- New debt on the credit card: $16,500
- Outstanding balance on the credit card: $142,710
- Total budget cuts: $385
I know that this is macroeconomics vs. microeconomics. But the orders of magnitude are correct, and it can’t look good to anybody. I’ve never really liked the macroeconomics theory that it’s okay for governments to carry huge amounts of debt as long as it’s “only” a certain percentage of GDP. The idea is that you’ll grow your way out of it. Europe has shown us that entire developed countries can default.
Now, I’m more of a microeconomics guy. I try to figure out the rules of the game and play it the best that I can. I avoid getting emotionally involved in things that I view are out of my control. But to me, it just seems like all the politicians ever do is kick the can down the road. You can’t do that forever.
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Growing doesn’t seem to work too well since we are quite good at spending faster than we are growing. But there are two other ways for us to get out of debt, right? I’ll never understand why we argue about which will work best; the arguing just delays the resolution while the problem grows. Just try both and get it over with.
That’s actually $38.5 billion and I’m not certain where that number came from. Maybe it is one year’s pro-rated share of the 10-year plan with the as yet unspecified cuts TBD by the SuperCommittee.
Heh, the one thing the US has going for it is that their credit card APR is under 3%, and the world is falling over itself to loan it more money.
I agree the US needs to get its fiscal house in order, but I also think it’s probably not a good idea to be making massive cuts during a fledgling recovery.
The real reason we have so much debt is because, while politicians TALK about Keynsian policies, they only spend more and tax less during recessions — it never gets ratcheted the other way during boom times (see the huge tax cuts and spending hikes during the Bush years). That leaves the government with less ability to use expansionary fiscal policy during recessions — and puts it under political pressure not to do so, even if it’s in the best interest of the country, and even the long-term debt (the worst thing for a country’s budget is a poor-performing economy).
One big thing though, we own most of our own debt.
And also, we have a very stable economy compared to the majority of countries in the world. Actually, we have the BEST economy in the world. So, even with what we Americans see as “unruly” spending, we must remember two things: 1) We might get a new president soon that can handle our money better, and 2) We’d have to fail really badly to drop our economy. Also, since our debt is so cheap in comparison to other countries, it would be stupid to not be in debt.
It makes sense to get into debt over things that will get us out of it. I.e. invest into stuff that will grow the economy. That’s how British Empire could run the world and we did too. At this point no politician looks at spending rationally, only defending their own turf.
Probably no deal will be best: 50% off defence and 50% off domestic spending, while passing the infrastructure spending bill (hopefully).
This not very good analogy was first posted by Philip Greenspun on his blog here: http://blogs.law.harvard.edu/philg/2011/04/10/understanding-congresss-solution-to-the-federal-deficit-problem/
Some aspects of why it’s not a good analogy are here: https://plus.google.com/102837097678487480685/posts/Lnder48VJm8
One critique of this analysis (I forgot the original source, too) is that a household can’t choose to raise their income at will, implying that this situation wouldn’t be so bad if taxes were raised.
@Him
Taxes can’t be raised infinitely either, at some point investors would flee and place their money elsewhere… I do see your point as European countries generally have much higher taxes…
Most definitely it would be a combination of both increasing taxes and decreasing entitlement spending
The original is from Philip Greenspun: http://blogs.law.harvard.edu/philg/2011/04/10/understanding-congresss-solution-to-the-federal-deficit-problem/
An argument of why this is a terrible analogy: http://www.pulppoetry.com/what-if-the-national-budget-was-a-family-budget/
Also, the family is spending $6,638 on guns and ammo every year.
Jonathan,
I consistently love your blog, but I truly hate it when people use language or analogies that rely on “household” concepts to illustrate something about the government finances of the largest national economy on earth. It really is a different animal, and the analogies tend to obfuscate more than they illuminate.
But even if we have to stay in that conceptual space, the details of the comparison can be improved. Speaking about a generic household with a big “balance on the credit card” evokes a certain response that is fundamentally misleading. The U.S. federal government is in a position to borrow money on terms that are vastly more favorable than the typical household with “debt on a credit card.”
The Treasury’s cost of funds is essentially zero in real terms. What if your same hypothetical household had access to a “credit card” with an effectively unlimited line for cash advances on the same terms? Given your personal track record with 0% credit card offers, I’d be surprised if you didn’t advise that household to borrow as much as they possibly could at that rate and invest it in something that will yield more over time — such as investments in human capital, infrastructure, etc.
I’m not trying to be argumentative, but there’s a great deal more to the story than you present here. And this doesn’t even begin to bring in dimensions such as international financial flows, the role of USD as reserve currency, the interrelationships between GDP growth and tax revenue, etc.
I think a big reason why our public policies appear so broken at present has been a very persistent drive toward oversimplification. Reducing complex problems down to an unrepresentative set of factors can make it a lot easier for people to delude themselves as to their level of understanding — and to embrace a similarly “personal” and ideological approach to dealing with problems. All of this makes it considerably harder for us to govern ourselves successfully and to address the critical challenges we’re facing.
And just in case anybody thinks this is just “pro-government” spin, I’d ask you to consider what would happen if the CFO of a major corporation suggested that the company’s debt should be aggressively paid down for reasons that are largely emotional and based on comparison to household budgeting.
Both he (and the CEO) would be run out on a rail by shareholders if they didn’t change their tune in a hurry. Issuing debt has significant tax advantages for a corporation, and adopting a capital structure without debt would rarely be anything other than value-destructive for shareholders.
In short: Government Finances ? Corporate Finances ? Household Finances
A few things the “USA as a family/household” analogy gets wrong:
(1) They fail to mention the net worth of the family. The $55T total household wealth of the US means that removing 8 zeros gives you $550,000. That’s right, the average household wealth is over half a million dollars. That is not a typo.
(2) The total income of the nation is $14.5T, or $145,000 for the average family. That’s GDP for the nation, not just taxes collected. Using this as your base, you need to add in fixed costs — basically, the money that everyone needs to survive (ie, what everyone in the nation keeps, after taxes). That’s $123,000 of that $145,000 right now. What’s left is the $22,000 in taxes that’s spent (along with taking on 16,000 in debt) to cover the $38,000 in government spending.
(3) The “credit card” you mention isn’t the 20%-interest variety most families think of; it’s 2-3%, which is basically the rate of inflation. Until rates go up, borrowing money is basically free.
Actually Pete, that’s not true. Steve Jobs did that exact same thing with Apple from 1997 to 2004.
Apple has zero debt and is the largest tech company in the world.
http://macdailynews.com/2004/02/18/apple_computer_now_a_debt_free_company/
While the comparison is not apples to apples, the orders of magnitude should scare anyone, whether they balance a checkbook, run a company, or legislate fiscal policy. I think that is the point of the analogy, not that you should run a company or government exactly as you would your own house.
However, in all cases, the same math is inescapable. If you borrow 40 cents of every dollar that you spend, it’s not even the interest rate that is the problem anymore. How are you even going to pay back the principal?!
We can all say that deficits don’t matter, but someday, they will. If we continue on this track, interest rates will not stay low. Even a small jump in rates will make a HUGE impact on interest payments, effectively crowding out the other parts of the budget. For now, we have some measure of safety, because everyone still believes the US will make good and because no one has come up with a better alternative, in terms of a reserve currency. It’s a house of cards – built upon faith, which, I believe, is utterly unfounded. The longer this goes on, the more likely nations and investors will turn elsewhere to safeguard value. As that happens, say goodbye to artificially low interest rates and to growing our way out of crippling debt.
At some point, the millstone around our necks will impede what growth may have otherwise been possible, as tax revenues (or inflation) absorb economic productivity and wealth and re-distribute it to unproductive, non-growth expenditures (interest and entitlements).
If I were paying “credit card” rates that the government paid, I’d probably put a new house on it because it’s going to be worth more than enough by the time I sell it to pay for the cost + interest.
Much like infrastructure investment.
I think even followers of macroeconomics wouldn’t argue that deficits never matter. Their point is that the current economic downturn is being driven from the demand side; that is, there isn’t enough demand to stimulate new investment. Why isn’t there? The answer is, obviously, a high unemployment rate.
So, business won’t expand because there’s no market for expansion. Consumers won’t buy in large numbers because there aren’t enough of them employed. Left to itself, it’s a Catch-22 situation, so some external force has to intervene. In ordinary times, the Fed could lower interest rates in order to stimulate demand, but interest rates are already at the lower bound, so they can’t do that.
The only player left with the muscle to effect significant change is the government, which it can do through fiscal policy: spending on infrastructure and other areas. Stimulus. So macro people argue for just that. The government should spend more now to inflate the economy, and dampen spending later when better economic times make it easier to pay down debt.
Some might argue that government spending never goes down once it’s been raised, but history does not bear this out. Domestic spending decreased after the New Deal with the expiration of WPA programs, and at various other points, and is currently decreasing as the 2009 stimulus packages expire.
@Pete – one might argue that the shareholders are the problem there, not the CEO who is trying to solidify his company’s net equity. One can certainly point to instances where shareholder insistence on dividends instead of sound internal financial practices has come very close to destroying some very large corporations (Six Flags comes immediately to mind, and Cedar Fair has become so disenchanted with shareholders trying to dictate fiscal policy that they’re looking to take the company private again).
I would disagree with your contention that issuing debt has advantages for a corporation – issuing SHORT-TERM debt can be advantageous and is a necessary strategy for any businesses, but in the long term having NO debt is a far stronger position. If your debt is seven times your annual revenue, you are in deep doo-doo no matter how much you can manipulate income.
“implying that this situation wouldn’t be so bad if taxes were raised.”
For those tax the rich enthusiasts, Id suggest reading up on the laffer curve…which suggests there is an optimum tax rate for which you will get maximum revenues. Tax too little and you will not get much revenue but people wont cheat/avoid taxes as much. Tax too much, and there is more legal/illegal and aggressive tax avoidance. Just look at the NJ millionaires tax hike as an example- NJ increased the state tax on millionaires only to have total tax receipts for millionaires decrease – the millionaires just leave.
“tend to obfuscate more than they illuminate.”
I wholeheartedly disagree – it is precisely these large numbers out of context that obfuscates the ability to grasp the magnitude of our debt problem. People need to relate the massive government debt to their experiences to make sense of this mess without having a phD in macro-economics.
“invest it in something that will yield more over time — such as investments in human capital, infrastructure, etc.”
How much of the borrowed 1.65T per year is really going toward things that will yield more over time? Im guessing a tiny percentage. Most is likely just being spent on things that are immediately consumed wit no long-lasting return on investment (ie: welfare).
Clearly, the US government is not a household and vise-versa. However, I believe most economists are in agreement that the US debt is running too high today; by how much is a matter of debate. If left unabated, this high debt could cause a major problem for the lifestyle that we enjoy in the US. I believe the point of these mental exercises is to help the public understand there is an issue. Obviously, Joe the plumber is not really going to know how to fix the issue, but Joe may now be more willing to listen to political campaigns which outline plans to right the debt ship.
I agree with Ben, the math is inescapable. The US has an awful lot of debt (14.5T) with an average maturity of 4-years. This will have to keep getting refinanced…if the world loses confidence in the US, even a slight amount, the resulting interest rate increase will push a majority of our 2+T revenue to go into paying interest.
This kind of specious argument is partially responsible for our problems, not a means of gaining insight toward a solution. Stop it.
Sorry, but I’m seeing a lot more conflation of concepts and glossing over of meaningful distinctions.
If “you” borrow XX% of every dollar that “you” “spend” — you or I will absolutely have our own views about what is appropriate in a household or business, but we can’t even get to the point of showing how shaky the analogy is until we consider what “you” even means…
Who are you talking about, and why? Clearly the IOUs held between members of Jonathan’s household are not part of what we’re calling their “credit card bill” — so at minimum we’ve got to throw out intragovernmental holdings and look at debt held by the public. That alone will drop that “bill” below six figures:
http://en.wikipedia.org/wiki/File:USDebt.png
Even with this adjustment, the household analogy fails to capture the fact that the vast majority of the debt held by the public is in some sense still “part of the family” — despite the rhetoric about USD holdings of China and others, foreign-owned Treasuries still comprise a relative small portion of the total. And it’s a bit different when your “household” is actually an extremely long-lived entity in which members of the same “family” are effectively investing their savings together.
Now consider what really makes the scary figures above look so bad — after all, there are some households out there that charge $80,000 to their credit card each month and pay it in full. What makes the numbers look so strained at this point in time is the “family income” line, which is in the tank because of a drop-off in tax receipts. As shown in the second figure linked above, we’re getting into the range of 60% of GDP — not great, but not exactly without historical comparison.
To keep the household analogy, it is as though the breadwinner has lost his job, and has gone back to school to retrain. He’s able to get student loans at a real interest rate near zero. His more short-sighted child is screaming bloody murder because he’d rather have some fancy toys, and he points out that his dad is taking on debt that is multiples of his family’s annual income (based on the mother’s part-time job) to go to an expensive school.
Rather than buy fancy toys, the father recognizes that the student debt is much better invested in increasing his income stream a year or two down the line. When he returns to work, the family income returns to its prior level and higher, and the debt is even less onerous.
The income potential for the household in this analogy is a share of GDP, and our debt is really so high in relation to GDP — particularly if we can take the appropriate steps toward economic recovery.
If the the “household’s” actual income is less than this potential — which is to say that tax revenue is underperforming in relation to GDP — the household needs to “get a job.” This means taking steps on the revenue side to bring tax revenue back in line with historical levels. It probably means increasing rates (and, ideally, simplifying the tax code as well). What it does not mean is that the household should forego investing in its human capital, or sell assets until it is living on the street.
I think this notion of “The Treasury’s cost of funds is essentially zero in real terms.” is a circular argument for justification of further government spending. I think that is also a gross simplification of what is going on and leads to dangerous conclusions. It’s like saying: “I spent $1,000 today, but i saved $3000 with coupons!”
I see the point in being smart about using debt to invest in productive enterprises, and then making data driven choices about how/when to replay that debt.
The question you have to ask is: “Is the government efficient in spending money on investments that will generate a positive return over time?” or “Does the government spend more money on consumables that do not generate a future return?”
It’s not just the spending that matters … it’s what the money gets spent on.
There is a huge difference in using debt for a car (to get to work), a tool (to make a product), or education (useful training), vs using debt to finance vacations, big screen TV’s, or other consumables.
I think the data would suggest the government is more like a college grad who takes out 100k in student loans to finance 4 years of partying and drinking, then graduated with an general studies major. Not a productive use of debt.
I do think the above cc analogy is helpful – because it help frames the discussions in ways people can understand … all the arguing / cuts that have been discussed are dwarfed by the actually spending and debt.
You can’t make the comparison between a household and a government (which has monetary sovereignty). You just can’t. Don’t want to get into it here.
I know that this is macroeconomics vs. microeconomics.
Well, yes. They’re not the same thing at all. You’re making an apples to oranges comparison.
But the orders of magnitude are correct, and it can’t look good to anybody.
Orders of magnitude don’t apply here because, once again, these are two separate things. For one thing, your average household, unlike the federal government, does not have the authority or ability to print its own currency.
For another, unlike an individual’s finances, there’s never any endpoint, no o of “retirement” for which the individual needs to save and pay down debt bu the goverment does not.
Finally, at present the federal government can borrow at essentially 0% interest long term — if you were a household and could borrow for 20 years at 0% interest, wouldn’t you take out that money and use it to upgrade your house, for education, a better car, etc.? It would be crazy not too.
It’s lazy and fundementally misleading to try to analogize federal budgeting to household budgeting
But to me, it just seems like all the politicians ever do is kick the can down the road. You can’t do that forever.
Actually, a goverment can. As I pointed out above, an individual can’t do that because at a certain point he retires, his paycheck goes down to zero, and he has to live off accumulated savings. But a government never retires, it continues indefinitely. If I can borrow for 0% now, why wouldn’t I do it and, essentially, “kick the can down the road”? In this case kicking the can is the prudent and responsible thing to do.
Now, remove 8 zeroes and pretend it’s a household budget: Annual family income: $21,700
The goverment can at any point decide to raise its revenue by raising taxes (especially since we’re at a very low level of taxation right now). The household, on the other hand, cannot unilaterally decide to raise its income. It’s a big difference.
As long as the US has the most powerful military in the world, we are fine. And I am not even kidding.
The true strength of dollar has nothing to do with economy…
“Actually, a goverment can. [kick the can down the road indefinitely]”
This is incorrect, unless the interest rate stays near 0% AND you can keep refinancing debt by selling new bonds to pay off the old AND/OR your economy grows at an amazing rate.
There is a reason that even Obama says our current spending/debt situation is unsustainable.
The FED/government is losing control of the debt – just look at the twist and shout failure. Where are both the 10-year and 30-year bond rates? Higher than before this latest fraud. These rates wont stay low forever. Ive heard it said that the US currency is the worst in the world, except all others. We here in the US better hope the Eurozone doesnt get their act together and build a strong currency.
“As long as the US has the most powerful military in the world, we are fine. And I am not even kidding.”
What is the logic here – are we going to hold the rest of the world at gunpoint to buy our printed fiat currency?
I think that, although we spend the combined budget of the rest of the world on our military, our military is not very effective…we are now in the two longest wars of our existence.
“we’re at a very low level of taxation right now”
If you are a 1099 employee, our marginal level of taxation is easily over 60%. Of course, the effective will be less when you include deductions.
Fed Income – 35%
Fed (SS) – 12.4%
Fed (Medicare) – 2.9%
Fed gas tax *
State – 9%*
Property Tax – 5%*
Sales Tax -8.75%
State gas tax *
* – should be normalized to income, income varies
The truth is, the total tax we all pay is quite a high proportion of our income, it is just broken out to so many places it is getting hard to sum up.
Andy,
Just a quick note on Apple, which you cited as an example of a “debt-free” public company. It is true that optimal capital structure, dividend policies, etc. can be a matter of real debate in corporate finance, and there is certainly significant variation to be found in standard practices based on the industry, company size, point in life cycle, etc.
Apple is a bit of an outlier in this area as well as others. I’ll readily concede that their shareholders haven’t exactly revolted in recent years — but that’s the kind of thing that can rapidly change, especially if their business growth outlook were to dim.
As it stands, the idea that Apple (and some other tech companies sitting on giant piles of cash, such as Oracle) are not exactly doing right by their shareholders is not exactly new:
http://www.marketwatch.com/story/story/print?guid=349563E0-E6F5-4C3E-8379-87F40210432E
(Don’t forget to read down to the “While you’re at it, Steve, borrow some money too” subhead…)
Mikef: Believe me when I say that I hear that — the composition and marginal rates constituting my own tax burden are quite similar.
However, this again points to the dangers of “personalizing” matters of fiscal policy and macroeconomics. Even if people weren’t confused about marginal rates versus effective rates of taxation (they are), and were able to easily conceptual the role of various taxes in their own economic lives (they aren’t), the comparison still wouldn’t be especially appropriate.
It’s far more instructive to look at the aggregate total US tax revenue as a percentage of GDP. Historically, this has been about 18% — and has rarely been outside of a 16-20% range. Recently, however, that rate has fallen below 15%. Observers may differ on whether this is a good thing or a bad thing — but it certainly doesn’t point to overall taxation being “high.”
Here is a useful source on this:
http://www.deptofnumbers.com/blog/2010/08/tax-revenue-as-a-fraction-of-gdp/
It is also instructive to look at the composition of that revenue over time. Income taxes (as a percentage of GDP) rose throughout the 1990’s to reach 10% in 2000, and in the next decade fell considerably to a level (~6%) not seen since 1950. Over the same six decades, corporate taxes (again as a percentage of GDP) fell from a 4-5% range down to a figure around 1%.
Bear in mind I am not suggesting the answer to all of this is higher corporate tax rates — if anything the long-term trend points to the ineffectiveness of the current regime given the removal of constraints on cross-border capital flows.
It also helps to explain the personal experience of many individuals that Mikef and others have been referring to. The above trends in personal income and corporate taxes have shifted the overall composition of taxation, leaving a relatively higher burden to be carried by the payment of taxes for social insurance (even though the amounts raised by these payroll taxes have remained relatively constant, at around 6% of GDP, since the 1980s).
As has been said, comparing the national debt to a credit card is a poor analogy. It’s sub 3% putting it in the realm of a REALLY good rate for a mortgage. It’s better than a mortgage though, since it’s unsecured. We’ll run with the mortgage analogy though since not many people can identify with a 3% unsecured loan that we can get just by offering to take the loan.
Let’s break down that household budget a bit more. I’m going to change the numbers a bit to make math easier, but the percentages should be the same:
We make $1297 a month and grama, who lives with us, kicks in $865 from her pension income for a total of $2162 a month or about $28.3k a year
We spend $701 a month on Grama’s room and board
We spend $453 a month on healthcare for Grama
Our kids health care costs $290
We’re paying ADT $663 for a home security system
We have other assorted bills totaling $416 a month.
We spend $660 a month on discretionary purchases such as:
$79 on stuff to keep us healthy,
$72 on car maintenance and repair
$52 to help out cousin Joe who got wounded over in Iraq and needs a little help getting by
$51 dealing with our neighbors
$47 on home repair
$46 on school supplies
$42 on other home defense related costs
$26 on modernizing and maintaining the wiring in the house
$26 on our vegitable garden
$24 on trying to get our kids to behave
$19 on our model rocket and astronomy hobby
$13 on commerce related expenses
$13 on work related supplies
$13 on supplies to manage the house finances
$12 on general home maintenance
$10 on cleaning supplies
$7 for our science hobby
$11 put aside in case of an emergency
and about $140 a month in other assorted expenses.
We have an outstanding mortgage loan of $168,000 which costs about $164 a month in interest payments.
That totals about $3552 in expenses a month or $42624 a year.
Again, we only make $28.3K a year.
Now, our neighbors make about 66% more than us per year for the same job but we’ve been taking voluntary pay cuts for the past 30 years because our boss said it would be good for the company. Some of our neighbors even make twice what we do and the companies they work for are still doing great.
So here’s the real question, should we:
1. Raise our salary to something more in line with the industry standard
2. eliminate virtually all discretionary spending including home and auto maintenance and home security spending
3. let our debt continue to grow
4. tell gramma to stop taking her heart medication and live in the unheated garage eating only cat food
LOL @ Ben : “the family is spending $6,638 on guns and ammo every year.”
Mike F said : “If you are a 1099 employee, our marginal level of taxation is easily over 60%. …
Fed Income – 35%
Fed (SS) – 12.4%
Fed (Medicare) – 2.9%”
No.. the marginal tax rate is not 60%.
If you pay federal income tax marginal rate of 35% then you are in the top tax bracket. Social security payments are phased out at $106k which is the 28% bracket. The top marginal tax bracket combining income tax and SS for 1099 is therefore NOT 35% for fed income + 12.4% for SS. Because if your income tax rate is 35% then you’re paying marginal 0% to SS. So, no you can’t add those to get the top marginal tax rates.
Most states don’t pay 9% income taxes and if they do thats up to the state.
Property tax, gas tax and sales tax are not marginal taxes.
Budget cuts should have been more like 14 cents since virtually all of it was accounting gimmicks and smoke and mirrors.
Here are some real budget cuts and revenue enhancers to think about:
1- Tax the Church and other religions like the businesses they really are
2- Eliminate the tax deduction for political contributions
3- Tax the recipients of political contributions as if the contributions were ordinary income
4- Eliminate all family travel perks for elected officials
5- Eliminate all subsidized food for elected officials
6- Cut salaries and benefits of elected officials by 40%
7- Just cutting Hillary Clinton’s and Nancy Pelosi’s liquor budget would save millions
You’ve made a mistake when simplifying to a household.
You didn’t change the denomination of the debt into a liability the household controls. Therefore you are comparing apples and oranges.
Try doing it again in ‘brownie points’ that you award the kids, where you ‘borrow’ and ‘tax’ those brownie points. Then you’ll find that you’re swapping brownie points that you award for ‘brownie point savings bonds’ that you also award but which attracts extra brownie points that you just issue.
And you’ll find that as brownie point issuer you can do all that without requiring any real effort or cost on your part. The kids, however, have to work for them. To them ‘brownie points’ require real effort to obtain.
It is what a debt is denominated in that matters. The US government sector (including the Fed) has no real debt because it is denominated in another liability it alone controls. That makes the numbers above just another liability that can be eliminated with a simple accounting journal.
debt is only debt when it requires future work and energies to eliminate. Debt in a foreign currency or where you have pegged to a third party liability (as the Euroland governments have done) are real debts.
I’d recommend reading the modern monetary primer. Macroeconomics is not simply scaled up micro.
http://neweconomicperspectives.blogspot.com/p/modern-money-primer.html
First of all, what Pete said.
Second, Ben – thanks for the link to the arguments against this analogy, I enjoyed reading that. My favorite was “Cost of your daughter’s astronomy kit – $3.79 (she was really into astronomy in the 60s) “.
Third, David – political contributions are not tax deductible. Although given your “liquor budget” point, I’m not sure how much of your list was supposed to be serious.
Glad to see that most of the comments recognize that comparing a household budget to the government budget really is apples and oranges, not just because of the numbers but because an individual is not the same thing as a government. Individuals grow up, grow old, retire and then die. They have very different financial needs and situations at every point in their life cycle. Governments act as if, and should act as if, they will endure forever. They should be constantly investing for the future generation, not planning for their own retirement. Obviously our current situation is out of control, and a lot of our recent fiscal policies have dug us a deep hole, but this analogy to an individual’s budget is a red herring and just the sort of thing that the Tea Party salivates over.
Wow. I didn’t know the key to all our deficit and debt woes was as simple as performing a neat accounting trick. I assume you’re referring to monetizing the debt. If that’s all it takes (now or in the future), we have the power to solve our problems first thing Monday morning. Print up $14T, pay off our creditors (with no work), and voila! we are debt free!
What you seem to be ignoring is the tremendously pernicious consequences of an action like that. Any significant attempts to monetize our debt will result in 1) spiking interest rates and 2) debilitating inflation. Sure, it would represent a transfer of wealth from creditors to debtors (which will never happen, by the way, because the big banks run monetary policy), but it would also cripple investment and make feeding our families a hardship for some time.
The analogy to household finances made absolutely no reference to retirement, dying, or winding down ones assets. The above household (or government) will find itself in financial ruin long before retirement breaches the horizon.
Governments, in point of fact, do not last forever, and should not act as if a never-ending stream of future generations will be willing and able to shoulder the burdens they create in the present day. Nations and empires crumble for just the sorts of behavior our government continues to engage in.
Making investments in the future generations may indeed be a worthwhile goal of government, but we are not in our dire financial straits because our government invested in the future. As I said above, our government has and continues to spend the vast majority of its revenues (from taxpayers) on wars, entitlements, and interest payments. Tell me how any of those things will produce a brighter and more prosperous future for our nation.
This makes America look bad. yes the condoning of high debt does come from the assumption that a country will grow its way out of it. But the US economy is not growing, its stable. And the debt has been raked up like a growing nation would. In the current round of recessions USA has been too big to fail and hence our creditors continue to buy our bonds. Unless America starts growing again that might change and we will have the creditors start influencing policy. We msut remember that before we charge our Holiday purchases on credit card.
All analogies have shortcomings, but that doesn’t make them worthless or misleading.
Yes, there are differences, however the fundamentals stay the same.
Borrowing today limits the choices in the future, as all debts must be repaid.
Deficit spending today is a promise to raise taxes later. It’s confiscating wealth from the future, making choices for them today, and limiting their decision making ability tomorrow.
To dismiss the debt level because ‘taxes can be raised’ or ‘money can be printed’ is both dangerous and ignorant. Both those policy decisions have real impacts on peoples lives, and both are a form of wealth capture.
I’m glad that Pete explained that all of this government debt and deficit stuff is way too complex for the average citizen to understand and that I shouldn’t be concerned about it. It’s just way over our heads and we shouldn’t be concerned. At least that’s what I’ll tell my kids and grankids when they ask me someday why we continued stealing $1.5 trillion per year from future generations.
Wow, the “sophisticated” apologists for runaway debt spending are really touchy about this one. Even if a household budget is not an exact analogy to a government budget, there same limitations do in fact exist over the long run, and governments who ignore this fact have indeed lost the ability to borrow, resulting in painful budgetary adjustments. And the notion governments can just raise taxes more or less indefinitely with no growth consequences in pure fantasy.
Some other silly points made above:
“the family is spending $6,638 on guns and ammo every year.” — ok, but that outlay also also includes most of the cost of city’s police force, tons of R&D, and all other forms of security spending. There certainly is room to cut security spending, but do you think the U.S. budget only includes “guns and ammo”?
“That makes the numbers above just another liability that can be eliminated with a simple accounting journal.” — oh yeah, debt cancellation would do wonders for the economy and the govt’s future ability to borrow money. Works every time it’s been tried!
“that rate has fallen below 15%. Observers may differ on whether this is a good thing or a bad thing — but it certainly doesn’t point to overall taxation being “high.”” — this is the impact of great recession, not a tax policy change.
“I think a big reason why our public policies appear so broken at present has been a very persistent drive toward oversimplification.” — interesting opinion, I think the opposite. A self-deluded technocratic class has over-complicated some basically simple issues and labeled opposition as “emotional.” Sorry, but simply asserting one’s position is based on reason while the opposition is based on voodoo logic is a way to avoid a serious debate, not a winning argument.
This is probably one of the more political posts I’ve seen here (but not that it’s necessarily a bad thing; the comments so far are pretty even-keeled).
The most important thing to take away from 42 (and counting) comments is that there’s a lot of different views and potential ways to address this imbalance.
Taking absolutist stances like “We’re not going to raise taxes $.01” or “The rich should bear all the tax hikes, and by the way, more tax cuts for the middle class” aren’t going to cut it in this complex situation. We are all going to have to listen and compromise somewhere to really address this complexity; be suspicious of a politician who tells you otherwise.
Ben,
It’s important to realize that the US government is not ever constrained by revenue. There is no need for the Fed to “monetize the debt” because the Treasury spends money before debt is ever issued. The fact that the USA issues bonds to cover its excess expenses is a remnant of the Gold Standard Era. The Fed/Treasury would never print $14T to cancel all of its debts because there is no logical reason to do so and would likely cause rampant inflation. Government finances are in no way analogous to household finances.
I agree that an MMT primer for all Americans would be very beneficial. The government can never default on debt that is denominated in a currency it alone can print (unless it is voluntary). This also explains a very important reason to why bond sales by the Treasury never fail–they know the amount of reserves banks hold, and hence, know how about much to offer. They are simply exchanging demand notes for interest bearing notes. This is analogous to the Fed’s QE1/2/(3)–there were no new net financial assets created. They are simply exchanging assets. Of course, it can be argued that the assets they swap for may or may not be worth what they “pay”, but it’s still a moot point. The Fed does not and never has monetized the debt.
When the government spends more than it taxes, like it is now, the government spends more money into existence and creates additional new financial assets. When they tax more than they spend, the government is removing financial assets from the private sector. Why on earth anyone would want to raise taxes on anything at this phase of our economic cycle is beyond me–but then again, I’m no economist.
I agree with you, when speaking of income streams, spending priorities, etc etc. However, despite the insistence of mainstream economists, the math is the same. The ratios we are talking about are scary in either case. The math will take over at some point, forcing investors truly to re-evaluate the “full faith and credit”.
Whether we are talking of default through repudiation/bankruptcy OR more subtle forms of default (inflation, cutting back on promised benefits), default will happen. I do not believe future taxpayers will suffer the necessary tax burdens without some form of default. In any case, the government does not print our currency. A banking cartel, supposedly independent of the government, does. Its stated goals are to maintain price stability and full employment -both of which it has miserably failed at.
If, by assets, you are speaking of items of real value (shares in a company which are claims on future income, real estate, commodities), you would be right. However, if you are saying that no new money was created, you’d be wrong. The FED is monetizing current spending and toxic assets held by (surprise) the big banks, which it is the FED’s true mission to protect. While the FED may not be sending this newly created money directly to China or to savings bond holders, the effect is the same. The money supply goes up and other holders of that currency see their wealth diminish.
While the greenbackers would love it if this were true, it is not – we are still in thrall to the big bankers and their money cartel. But since the financial aims of the government are so dominated and subjugated by these same bankers, perhaps the end result is roughly the same as if the government was the entity printing all the money and “spending it into existence.”
The problem with looking at the US financial situation like this, at this time, is that we are in the middle of a massive recession. It’s the equivalent of looking at a well qualified professional person’s income immediately after they have lost a job. Their spending will look like a lot compared to their income, but they have a great chance of getting another job soon, just like the US has a very good chance of revenue increasing dramatically if we got out of this recession. The analogy doesn’t carry much further because it’s just an analogy.
Ben,
Thanks for the reply.
Let me start off by saying that I think we are arguing two sides of the same coin. I’m not a fan of our current government’s spending habits, let alone the Fed’s monetary policy. I simply wanted to point out some of the fallacies that are commonly accepted among the public.
As far as budget deficits, I completely agree that current spending is unsustainable. I would prefer that the “balancing” come from budget cuts as opposed to rises in taxes (taking financial assets out of the private sector), but that’s a political point that we won’t dwell on (no, I’m not republican).
As far as “printing our currency”, that’s debatable. Today, money is created via crediting bank reserves more so than actual printed bills. The banking cartel, which I agree is an apt definition for the Fed, prints money at the Treasury’s request. Here’s the kicker. The treasury, via the congress, issues payments using a checkbook that is as bottomless as the congress allows. Our reckless government’s spending is more of an issue to me than the Fed’s horrible excuse for “accommodative” monetary policy.
The difference between the Treasury and the Fed as far as monetary policy is concerned is the Treasury issues debt to soak up the excess dollars it spends into existence. This accounts for the “debt” owed by our government. Alternatively, the Fed “buys” Treasury “debt” and issues Federal Reserve Notes in exchange for them. This is supposedly “printing money”. I am in the camp that this is not actual “money printing” simply because the Treasury market is so deep and liquid that anyone holding Treasury Bills/Notes/Bonds could easily swap them for cash. They are as liquid as cash in a broad sense. This make the “money printing” by the Fed for Treasury Bills/Notes/Bonds irrelevant because those notes are already analogous to cash. This is why QE1/2/(3) are a non-event.
You brought up an excellent point about toxic assets. The Fed buying assets from banks that are NOT Treasury Bills/Notes/Bonds is egregious. This is simply giving gold for lead. This is also where all arguments that could possible be “Pro-Federal Reserve” (which I am not) fail. The Fed buying these assets was pretty unprecedented to the say the least.
I think your last comment hits on an important point. The role of money in politics leads to those controlling the money to control the votes in our government. Just like advertisers controlling news stories on major networks. The only way to change this would be massive overhaul of how political donations and compensation works, which is never going to happen. There are so many ways I could take this conversation, but all I will say is:
“IN THE MORNING!”
http://www.shutupslaves.com
Matt,
Thanks for your reply and your civility. I see and take your points. I still see a great danger looming once investors start to lose faith in the dollar. As the liabilities mount, which our politicians seem to have little interest in controlling, we’ll either be faced with higher taxes, higher inflation, or generational conflict.
As to reforming the political process – I agree, but I think it can be done in simpler fashion by removing the moral hazard. End the Fed, end fractional reserve banking, and remove the moral hazard. True, our system would probably crash, since we haven’t had anything approaching real money since 71, but it’s the only medicine that will ultimately work.
Anyway, I think we’ve sufficiently thread-jacked this one.
The only money statistic not mentioned in any argument is the balance of the Federal Government’s savings account………$0.00
You budget hawks are all missing the basic point with your government investment strategies. The US government was put in place to be very basic and not overreaching. It was suppose to secure the safety and the basic rights of it’s citizens. It’s not there to take peoples money because it has a better investment stategy. It is suppose to only perform a few base services and that’s it! What we need to do is whittle down the spending list to a few item and get rid of the rest. The only reason the list is so big is because everyone votes for the person who promises them the most -FREE- stuff! Well guess what? It’s not free you pay for every bit of it and more! And your grandchildren will be paying for all of your -FREE- stuff. So sit back and enjoy while -FREE- healthcare bankrupts us all!!!
Unfortunately, both parties are to blame. Two sides of the same coin. The American public is too distracted and uneducated to care. MMMMM I love the smell of ignorance in the morning…
Time to rid the planet of useless eaters.