Southern Man

Saturday, July 30, 2011

How Broke Are We?

Hat tip to this post by Dan Spencer at RedState, who calls himself a California Yankee but manages to make a lot of sense nonetheless. Some of the figures in the paragraph below are his.
Imagine a family of four in which the breadwinners bring home $50,000 per year. Unfortunately, they spent $79,000 last year and are on track to spend $86,000 this year. Incredibly, cutting back their "discretionary" spending won't balance their budget; their fixed payments alone exceed their income. They already have $330,000 in credit-card debt and have promised the two children that they'll eventually collect about a quarter million dollars in benefits. Each.
Now Southern Man asks four questions:
What would it take for this family balance their budget?
What would be required to sustain their current lifestyle indefinitely?
How can this family pay off their current debt?
How can this family make good on the promises made to their children?
This is (obviously) a scaled-down description of the state of our current national finances, similar to many floating about the 'net and many liberals argue that it is a poor analogy. We'll knock these arguments down one by one, beginning with this post on Political Animal, where the claim is that borrowing during hard times is fine and that you make up for it when the economy improves. Unfortunately, that hasn't been the pattern; the government borrows in both bad times and good. When families take on debt, they typically have a plan for repaying that debt; the government pays interest on debt but never principal. It is also argued that we can grow our way out of debt. Again, history shows otherwise; federal revenue rises, but spending rises more. Liberals gripe about the Reagen-era deficits without mentioning that in those eight years federal revenue very nearly doubled. You can't grow your way out of debt if you increase your spending at the same rate or more as your increases in revenue.

In this article at the Boston Globe Jesse Singhal calls the household analogy "inane" and scoffs at the notion that "at a time when so many families are struggling, it's only fair that the government should cut aid to struggling families." Jesse, if the forty-year War On Poverty has taught us anything at all, it is You Get What You Pay For. Government assistance has created a permanent welfare class, which requires permanent government assistance, which creates what the Democrats so dearly love, a growing population who can be counted upon to check the D box in every election. Not to mention the beloved Democrat notion of "fairness," which usually entails taking from one group (wage-earners, entrepreneurs,business owners, and other non-Democrats) and giving to another (Democrats or potential Democrats).

Daily Drew also takes issue at comparing government to households and argues that it's fine to incur debt if the ultimate goal is to improve your lot; the example used is to buy a second car in order for a family member to take on a second job. He's right - governments are not families. And he's wrong - while families may take on short-term debt in hopes for a long-term gain (houses and cars and tools and college educations come to mind) governments never do this; they take on debt to pay their current obligations, not as part of a long-term plan to eventually get out of debt.

So now let's answer the questions, for both the family and the government.

What would it take for this family balance their budget?

When a budget is unbalanced, one can increase revenue, decrease expenses, or both. The family can increase revenue by working harder (or smarter) and can decrease discretionary spending. Since their fixed spending already exceeds their income, they must do both. And if that's not enough, they'll have little choice but to default on some of their debt. The government has the same options. Unfortunately when it comes to revenue, they're already taking the largest percentage of GDP since WWII so their best option to increase revenue is to increase
GDP - an option that our family does not have. If Southern Man is correct and we are indeed on the high side of the Laffer Curve one way to increase GDP is to reduce taxes and this might actually happen in the current climate in Washington. As for spending - well, unfortunately, government spending never decreases; a "decrease" in Washington-speak is simply an increase that is smaller than originally requested. An actual decrease, as in "spending less money this year than we did last year," is unlikely but one can still hope. Defaulting on debt may put a bankruptcy on your credit report for seven years; the effect on the government will last a bit longer.

What would be required to sustain their current lifestyle indefinitely?

As some liberals argue, balancing the budget is irrelevant as long as the government can borrow money. And, so far, this has held true. But this is not the case for our hypothetical family; there will come a time when their creditors judge that they are no longer able to service their current debt, much less take on more, and the flow of money will stop. The result for our family would be catastrophic: they in all likelihood declare bankruptcy, suffer a sharp decrease in their standard of living, and default on not only many of their current debts but on most or all of their future obligations. Will this happen to the government? And what happens if it does? One might look to Europe for one set of fears; the primary reason that the US government supports yet another bailout of the Greek economy is that if a major nation defaults the entire house of cards might come crashing down, and that might occur with terrible swiftness.

How can this family pay off their current debt?

To pay off debt a family must principal as well as interest. To date, the government does not pay principal. However, the government has an option not available to our family - increase
inflation at a rate that exceeds interest on the debt. To mask that they are already making use of this option the government has continually altered the formula by which inflation is computed, generally by changing what is and is not included in the CPI - indeed, it is claimed that the CPI actually dropped in 2009 although food and energy costs rose dramatically. Using the same metrics as used during the Carter administration, inflation is currently running around 18%.

How can this family make good on the promises made to their children?

It has been pointed out that our government's current obligation to future generations is greater than the total sum of all of the money in all of the currencies in the world - estimated to be the equivalent of $60 trillion. This does not make meeting those obligations impossible; the total wealth of the world generally increases with time and one might note that there was far less than that amount of wealth in the world a half-century ago. The question is, will the increase be sufficient, or will the state be required to default on some of its promises?

Southern Man predicts most of the above; his taxes will go up and his benefits (both current and promised) will go down. Inflation will continue to increase and the value of the dollar will continue to decrease. The percentage of tax consumers will continue to increase and the number of tax producers will continue to decline. His plan is to hope that people's faith in the economy holds out long enough that he can get his youngest child through college and settle down on
The Land with a big garden, no debt, and some sort of long-term plan for TEOTWAWKI.

Hopefully Southern Man's neighbors do not have this particular plan.


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