US Budget Numbers Simplified To The Household Level
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:
Now, remove 8 zeroes and pretend it’s a household budget:
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.
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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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.
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…..rimer.html
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
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.
LOL @ Ben : “the family is spending $6,638 on guns and ammo every year.”
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
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/b…..on-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).
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/sto…..F40210432E
(Don’t forget to read down to the “While you’re at it, Steve, borrow some money too” subhead…)
“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.
“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.
“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.
The true strength of dollar has nothing to do with economy…
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.
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.
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
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 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.
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.
This kind of specious argument is partially responsible for our problems, not a means of gaining insight toward a solution. Stop it.
“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.
@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.
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.
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.
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).
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/2004/0…..e_company/