It is currently popular among politicians and pundits to compare our National budget and National debt to a household budget. A recent article (SF Chronicle Insight, 3/25/12, p.E.3) argued knocking off a lot of zero's to make the Federal figures more like a household budget could make the Federal budget more comprehensible to the average voter. The article then argued the problem with solving the deficit was the Democrats not wanting to take up Medicare reform.
I think the household budget comparison is a grand idea, but needs to be refined a bit to make it fit reality.
The article, after knocking zero's of the Federal figures, came up with an example of income at $24,700 and expenditures of $38,000. This produces a yearly deficit of $13,000 with a total accumulated current debt of $115,800. Sounds bad.
But lets look a little closer. If are going to treat the Federal government the same as a household, it immediately becomes apparent that the $24,700 figure isn't really household income, it is just what we choose to put in the bank to cover bills. In fact, the actual income figure would be somewhere around $90,000 (using US Treasury data that Revenue as about 30% of gdp).
So our actual expenses are far below our income, and our debt only slightly larger than our yearly income. But we still do have some significant debt. Where did it come from?
The Federal government has two primary sources of income, the income tax and the payroll tax.
The income tax, 50% of which goes to fund defense spending, is what we use to fund government operations. It is sort of like what we put in our checking account to pay bills.
The payroll tax funds employee benefits like Social Security, Medicare and unemployment insurance. It is sort of like what we put in our savings account for retirement, illness or emergencies.
Since the 1930's the household arrangement has been that members of the household contribute to the checking account based on a percentage of their income, while the savings account is funded by each person paying a much smaller percentage of their income on their earnings up to $100,000 per year. Any income over $100,000 isn't counted. The savings account amount is significant for most members of the household, but is chump change for the wealthier. Someone making 5 million dollars a year will pay the same amount as someone making $100,000 a year, and not much more than someone making $25,000 a year. So the savings account is funded largely by the working folk.
So lets look at our household history. In the 1980's the wealthier members of our Federal household convinced enough household members to vote for them to take over the budget. They cut the required contributions to the checking account, particularly for the wealthier members. At the same time they also boosted spending out of the checking account,primarily on household defense. They paid for the increased spending by borrowing money. Over the years as the debt accumulated they sometimes borrowed from the savings account, giving the savings account an IOU.
This was a double reward for wealthier household members since, besides lower contributions to the checking account many of the wealthier members had financial interests in the defense companies on which the household was now spending more money. So the household was now spending more to the business benefit of the wealthier members, even as the wealthier members were paying less toward household expenses. So individually they were doing quite well even as the household debt accumulated.
In the last decade the wealthy members of our household again managed to grab complete control of the household budget and again they cut contributions to the checking account even as defense spending was climbing. Out came the credit card and up went the deficit.
How good a deal have the wealthier members of the household cut for themselves in the last 30 years? Profits to private business from household Defense spending were about $645 billion in 2010. If we knock a bunch of zero's off to make it fit our household example that means rich members of our Federal household profited last year to the tune of about $5000 to $6000 from our household defense spending. The wealthier members of the household also profit from the borrowed money the household uses to buy complex computer systems from companies the wealthier members own, and from all the other household spending out of our checking account. It is more math than I want to do but I imagine that if we identified all the profits our wealthier members are making from our household spending, it would vastly exceed our $13,000 household budget deficit. Yet their contributions to the checking account have shriveled over the years as the deficit rose.
Lets examine the Savings account history. The savings account (payroll tax) has always brought in way more than it spent. The taxes that support the savings account have actually crept up, instead of down, over the last thirty years. The savings account has been partially depleted by IOU's from the checking account, but it still runs a big surplus.
Now some household members are trying to pin the responsibility for the deficit, not on the fact we have failed to fund the checking account , but on the savings account program, because there is not enough in the savings account to cure the checking account deficits and still pay for what the savings account was created to pay for.
The simple fact I take away from comparing the Federal budget to a household budget is the wealthiest members of the household have been shuffling the household accounts to their advantage for 30 years. Now that folks are concerned about the rising deficit those representing the wealthier members of our household want to preserve their wealth by raiding the savings account working folk are relying on to make their old age more comfortable.
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7 comments:
I can't imagine why anyone would find such a comparison a "grand idea."
The US is a monetary sovereign. It is the monopoly supplier of its currency, it is autonomous in that issuance, and its money is valued by the modern floating exchange rate system. It's power to create and destroy that money is plenary.
A household is not a monetary sovereign. Neither is California, Greece, nor GE or IBM. Why would these budgets provide any useful comparison to that of the federal government's, in any meaningful way?
I can understand why the politicians and ideologues invite us to make such comparisons. But if we hoi polloi are capable of critical thought, and seek to understand today's realities, then I think we must refuse the invitation.
Different rules for a quite different game.
I personally would prefer not rely to much on the US's monetary sovereignty, since it is a power that can be easily abused with some pretty bad consequences. So I am fine with playing along with comparisons with "non" sovereign budgets, even if they are technically different animals with much more limited powers. I'm cautious that way.
You say: "I personally would prefer not rely to much on the US's monetary sovereignty, since it is a power that can be easily abused with some pretty bad consequences."
I'm not sure what this means. I, personally, would rather rely on the reality of our economic system, both fiscally and monetarily, in framing arguments and critical analyses of its policies.
A household can become insolvent. The US government can not. Isn't this, alone, enough to render such a comparison misleading?
Your preference for the analytical framework of the "household budget" might have been appropriate when we were on the gold standard. With such a system, tallying up "credits and debits, assets and liabilities" as an inherent constraint on governments and households made sense. Of course, it's precisely that kind of accounting which led to the "pretty bad consequences" (i.e., the six depressions which have plagued our history) and prompted our rejection of specie-based currency and led to today's "fiat currency."
Those depressions (interspersed with myriad lesser "booms and busts") were the result of viewing the federal budget/balance sheet as comparable to that of the household. We've moved beyond that, today, and our efforts to smooth out the turbulent business cycles demand an entirely different analysis, based on an entirely different economic system.
The US has carried a national debt for all but 3 years of its entire history. It's six depressions were each immediately preceded by either balanced budgets or severe debt-reduction policies. Similarly with its severe recessions. Contrarily, I think we'd all agree that such budgetary discipline would bode well for the household. It would be healthy. History shows that comparing the national budget with that of the household, attempting to impose upon the federal budget comparable budgetary constraints and goals of the household, leads to those "bad consequences" you fear.
In today's politicized environment, to accept the invitation to compare the federal government's programs and policies with the constraints of the household is to skirt what's really at issue. It's an invitation to argue red-herrings and strawmen, rather than the real world. It's an invitation to argue politics, not economics.
If I'm of the school which wishes to "shrink the government small enough to drown in the bathtub" (a la Grover Norquist and those of his ilk) it's precisely the conceptual comparison I want my political opponents to accept. If they do, I'm going to win my argument, whether or not it reflects economic reality.
I tip my hat your uncompromising acuity. Far more accurate argument than my attempt to hoist the cut the deficit crowd on their own petard.
Re my comment on my preference for not relying to much on monetary sovereignty, I was only thinking since the sovereignty depends on public acceptance of the currency there are some constraints on sovereign behavior. In a worst case we could all decide barter or trading shells is more in our self interest than using the sovereign's money. That said, I do not at all disagree with your contention comparing public budgets to household budgets is a false comparison and not reflective or reality. But I find being reflective of reality is sometimes not particularly effective as political dialogue.
You say, "But I find being reflective of reality is sometimes not particularly effective as political dialogue."
How true! Especially when reality rudely clashes with ideology.
Your point about "public acceptance of currency" is, in many respects, what the "reality" is with respect to this issue. National debt does matter, despite what Cheney famously told us. But, I would argue, not for the same reasons and in the same way as our current political debate would have us believe.
However, a loss of confidence in the currency of a monetary sovereign is not necessarily the most fearsome spectre in the imagined parade of horribles. So long as the sovereign promises (and coercively mandates) that its currency shall be "legal tender" and acceptable throughout national commerce, backs it with "full faith and credit," Constitutionally requires "(t)he validity of the public debt of the US, authorized by law, ..., shall not be questioned," and requires that only it can be used to extinguish tax liabilities, then our "self interests" will not soon lead to a barter economy.
However, as we've seen periodically in the world since Bretton Woods, a "loss of confidence" in the currency of a monetary sovereign can, and has, happened, with real consequences.
We return to "reality," and our political dialogue. I've been convinced by those modern professional economists who urge a new definition for the word "debt" as it pertains to a national sovereign. Or at least a new, "term of art" technical definition which distinguishes between your and my "debt" and that of our Uncle Sam. Because they really are quite different.
Agreed.
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