Not all budgets are created equal – even if politicians say they are. The fed is much better off when it is short on cash
Today in homespun homilies that are out-and-out political hokum, we’re going to take on the case of why so many of us believe the federal budget should be managed just like our household finances.
This old saw is routinely trotted out by politicians looking to give themselves cover when they are talking about cutting – oops, I mean “saving” – programs most of us hold dear, like Social Security or Medicare.
The Romney campaign said it. Paul Ryan claimed it, as recently as a little more than a week ago. It’s not, you can all but hear them saying, that we want grandma eating cat food when she’s 90, but gosh damn it, we need to restore some integrity to our federal finances. After all, you, John and Jane Q. Voter, reconcile your family accounts regularly and can’t spend a penny more than what is coming in. Why should those big spenders in Washington, DC get away with doing something you mere Americans cannot?
“Every family in America has to balance their budget,” recently thundered Speaker of the House John Boehner.
I guess that’s why an online poll last year found 69% of us never reconcile our checkbook and another 10% rarely bother.
So what can be the appeal of this less than truthful analogy? The sad truth is it is a product of our profound financial ignorance.
First, the comparison sounds good. We don’t like debtors in this country, even if those debtors are ourselves. This is why former bankrupt turned anti-bankruptcy personal finance guru Dave Ramsey has a career. (Ramsey, if you are wondering, also promotes the canard that the federal budget is like a household budget.) We think we should be punished for debt, like a small child who has misbehaved. Then all will be well.
Actually debt is much more complicated than that. Take a look at the popular home mortgage. Many of us don’t see it as a negative drain on our resources. We seem to believe that as long as we can make the monthly payments without difficulty, we are not in hock. This is not true, as anyone who has ever done a net worth statement can attest. Net worth is determined by subtracting the debt owed from assets.
As long as you can afford the monthly tab, most financial experts would tell you a mortgage is a good thing to have. Why? Well, owning a home is a long-term investment, ultimately a good thing for your household bottom line.
Now, of course you could say a certain percentage of government spending is also a long-term investment. Just look at the economic stimulus plan enacted by the Obama administration. Not only does issuing debt and using it to build bridges and educate children offer an economic stimulus in the short term, it also boosts our prospects in the long run, as these investments ultimately improve our productivity for years to come.
Yet this nation of current and former mortgage holders doesn’t believe it. Internal Republican party polling obtained by the online publication Politico revealed that a majority of voters believe balancing the federal budget would “significantly increase economic growth and create millions of American jobs.”
Been to Great Britain lately? Greece? Italy? That austerity thing is working out just great for them. The more they cut, the worse the hole their economies face. That’s why Britain is likely entering its third recession in less than five years.
You cannot contract your way to economic growth. It takes money to make money. This is why personal finance gurus like Ramit Sethi, for example, tell their minions that if they believe they need more in the way of funds, they need to figure out a way to bring more in.
And this is where governments and households are very, very different from one another.
When we are short of money or run into a financial emergency, our options are not great unless we have generous friends or relatives. If we are lucky, we can turn to credit cards. Sometimes we can start up a small eBay or Etsy business, and bring a little bit of extra cash in. But for those of us who are really in financial trouble, we will seek out the services of payday loan lenders, where interest rates can run as high as 30% for a mere two-week cash advance.
The United States government, when it needs some cash, is in a much better situation. It can issue bonds to raise money – federal IOUs with very low interest rates. (The interest on the 10-year Treasury note is currently 1.91%, for instance). The government can raise taxes. As a last resort, it can even print money, as I pointed out last week in a discussion about the situation in Cyprus and why it can’t happen here.
As a result, despite the claims of many, many doomsayers (Peter Schiff, I’m calling your name), the United States economy is currently doing more than treading.
If there are any other personal finance statements uttered by politicians you would like me to parse, please mention them in the comments.