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America: Rich? Broke? Or Maybe Just ‘House-Poor’

MADISON, Wis. — Perhaps I'm the only layman in America watching the dueling-budget show right now in Washington. I know I should ignore it.

I know that the warring parties will forge no compromise, nor are they even likely to approach a deal — despite the fact that failure will likely slow America's recovery to a snail's pace. This spectacle of non-negotiation will reach its nadir at the moment some Congressperson compares the budget of the United States to the finances of a typical middle-class American household, and says — verbatim — “If the average family can balance its budget and live within its means, why can't our government do the same?”

The simple answer has always been that the US government bears no resemblance to the average family.

This flawed analogy would be slightly more accurate if it cited not an average family but “the richest family in town.” America remains, by far, the richest nation on earth. Still, the metaphor fails because even the world's richest household — unlike Washington — has the right to mind its own business.

Borrower, lender
For instance, let's say the richest guy in town — let's call him Richard Cory — bumps into Joe Sixpack at the hardware store. Joe has lost his job. Richard Cory takes pity and slips Joe a “loan” of $50 to help him through the week. Both men understand that Joe never has to repay the money.

However, if the Cory clan were truly equivalent to the US government, Joe Sixpack wouldn't accept that $50 quite so meekly, nor would he pretend he was going to pay it back, nor would one generous impulse end the relationship. Instead, Joe would expect from Richard Cory a weekly stipend equal to as much as 75 percent of his former wages, for a period of at least 26 weeks. And every other laid-off worker in town would expect the same from the Cory family.

Big Upside

A house mortgage is like the federal debt: Economic  growth will outpace the interest payments.

A house mortgage is like the federal debt: Economic
growth will outpace the interest payments.

Moreover, as the richest guy in town, it wouldn't suffice that Richard Cory protect himself and his property by erecting a fence and keeping a .357 magnum under his pillow. He would be obligated — as the government is similarly obliged — to recruit, outfit, arm, and train a professional town militia to protect every neighbor against the militias of all the surrounding towns.

However, silly though it is to compare the household cookie-jar to an entire nation's fiscal responsibilities, there are instructive parallels. For example, both the federal government and the average family survive, thrive, and serve the greater good by embracing the concept of a substantial and prolonged deficit.

Consider the national debt. Right now, it's somewhere around $16 trillion, which sounds catastrophic. But it's only dangerous if we have to pay it off all at once.

And we don't.

House poor
The household version of that $16 trillion debt is a mortgage. Most mortgages — adding up all the payments — equal anywhere from three to ten times the borrower's annual income. Indeed, early in the mortgage, a fat down payment and the expense of having a child or two plunge a typical family into a condition we call “house-poor,” strapped by the mortgage despite a respectable income.

The mortgaged family is a family in deficit. If the bank demanded full payment, the family would face bankruptcy. But the bank, by extending the loan to a typical duration of 30 years, is a partner in the deficit.

The reason both family and bank willingly join together to shoulder this big fat debt is the linchpin of capitalism: growth. Although the interest charged by the bank will grow, the family knows that the equity in their house, combined with their increased earning power as they get older, will almost certainly grow faster.

They know that, barring some unforeseen disaster, they will erase their deficit over the mortgage's 30-year span. But over time, they've learned something more important — not to fear the deficit. They understand that if they manage prudently, they can live comfortably, despite a little debt, 'til the day they die.

As the family goes, so goes Uncle Sam — at least in this respect. The US government is always in debt. We've balanced the budget seven times in the last 60 years. The worst deficit in history resulted from World War II, and we never really never paid it off. We didn't have to. Saddled by the biggest debt ever accumulated, America just went on growing anyway and, by 1956, it was gone.

Likewise, eventually, despite the wailing of the Pharisees on Capitol Hill, America will surely — again — outgrow what we owe.

13 comments on “America: Rich? Broke? Or Maybe Just ‘House-Poor’

  1. Eldredge
    March 21, 2013

    Consider the national debt. Right now, it's somewhere around $16 trillion, which sounds catastrophic. But it's only dangerous if we have to pay it off all at once.

     

    Perhaps there would be some validity in this statement if it was obvious that there was intention to pay off the debt at all. But there isn't. Ans balancing the budget doesn't even accomplish any debt reduction. If successful, balancing the budget merely maintains the debt status quo.  Therefore, if there is no serious desire to balance the budget, there can't be any intent to pay off, and in fact, it will continue to balloon. It is the attitude that this is acceptable that is so dangerous.

  2. Brian Fuller
    March 21, 2013

    Well, here's to the electronics industry driving us out of this hole into a new period of economic expansion before the Chinese coming knocking on our door with collections on their minds. 

  3. Eldredge
    March 21, 2013

    @Brian – LOL – At least that may put us in a better position to make payments!

  4. David Benjamin
    March 21, 2013

    Eldredge: Reluctant as I am to take remarks like yours seriously, I will refer you to the point I made about the National Debt after World war II, which — measured as a percentage of GDP — was higher than it has ever been, even in the more recent period when the two unpaid-for Bush wars in Iraq and Afghanistan, plus the Bush tax cuts, helped trigger the Great Recession. The National Debt after WWII did not decline so much because Congress made an effort to pay it down. It declined dramatically because the economy grew, partly because of investments in the nation's infrastructure under President Eisenhower: e.g., the interstate highway system, rural electrification, the GI Bill. Even the Marshall Plan, in Europe, played a role.

    The National Debt does not just keep going up. It fluctuates with the economy. This is why the raw number of the National Debt is so wondrously simple-minded, and why economists prefer to count it as a percentage of GDP. Frankly, I don't know the current state of the Debt vs. GDP, but I do believe the many reports indicating that, since 2009, this percentage comparison has been declining — put simply, the National Debt has been going DOWN.

  5. Eldredge
    March 21, 2013

    Simplistic as my response may be, how can the national debt be going DOWN when expenses exceed receipts? Doen't work that way in my budget.

    Sometime the common sense answers are correct.

  6. David Benjamin
    March 21, 2013

    The deficit for 2009, Pres. Bush's last budget, was $1.4 trilion. The 2013 budget, proposed by Pres. Obama, is $901 billion. By my data, the former figure exceeds the latter figure, implying strongly that not only have receipts exceeded expenses, they done so at an annualized rate of almost nine percent. At this rate, we'll wipe out the whole National Debt in just over 30 years — which is, coincidentally, the span of your typical home mortgage.

  7. _hm
    March 21, 2013

    For a world super power like US, its economy should be completely independent of its ruling government (Democratic or Repulican), its policies and yearly budgets.

    As I look at it, US has lost this edge and people are not so productive and looks more lethargic and confused. Lack of higher education is its achilles heel. If you put in sincere work, there is always a way to achieve dream, albeit it may take little more time. US citizen do not have other short cuts.

  8. HM
    March 22, 2013

    Not sure lathargic is a right word in context. US guys are very focssed on what they want to achieve in their lives. They dont just keep saving for tommorrow, they enjoy the present. And everyone knows they have to pay for their own lunch.

  9. Brian Fuller
    March 22, 2013

    We've had a handful of balanced budgets in the past 60 years, and it's unclear to me whether we'll ever have another handful. The U.S. is 300 million strong and has built vast numbers of safety nets for its citizens. People are loathe to give that up, especially in an aging population right now.

    We probably will find some savings with defense cuts in the next two decades as warfare goes more cyber and less battlefield, but that'll be an almost imperceptible process. 

    Maybe we'll just kick the can down the road forever. 

     

  10. David Benjamin
    March 22, 2013

    Brian: Exactly. As loaded as is the phrase, “kick the can down the road,” it describes 60 years of fiscal policy in which America has remained the dominant economy in the world. As your sainted father probably said many times: “If it ain't broke, don't fix it.” Benj

  11. Eldredge
    March 22, 2013

    You are correct that the deficit in 2009 was 1.4 T$. But as an engineer, I know that two data points do not a trend make. So let's look at more data:

    Deficit by year:

    2013  0.901 T$ (estimated)

    2012  1.089 T$

    2011  1.30 T$

    2010  1.293 T$

    2009   1.413 T$

    2008   0.454 T$

    2007  0.161 T$

    2006   0.248 T$

    Since 2009, the yearly deficit has soared out of control, anr remains so even at .901T$.  This data does not show that receipts exceeded expenditures anywhere in this timeline. We won't wipe out the national debt in 30 years at this rate – we will merely finally reach a balanced budget in 30 years. For the mortgage analogy, in 30 years, we will finally be able to make the monthly payment.

  12. Mr. Roques
    March 22, 2013

    That logic works when the person that owes, is afraid of what can happen if they stop paying… but what happens when that stops worrying? People stopped paying and banks started foreclosing but that's not what they want.

    Can we translate that to country-terms? That can lead to war or diplomatic issues.

  13. _hm
    March 22, 2013

    @HM: I have utmost respect for USA and perhaps it was always admiration for almost four decades. But if you compare zeal of people in that period and their achivement and compare it with contemparory work ethics, my feeling was the word I used. It is basically comparision to efficiency and productivity of previous US citizen and immigrants.

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