MAKING SENSE -- November 16, 2012 at 11:34 AM ET
If the US Budget Were a Family's, We'd Be Hopeless
Photo by Frederick Bass via Getty Images.
Paul Solman answers questions from the NewsHour audience on business and economic news here on his Making Sen$e page. Here is Friday's query:
Heena: Hi Paul, I love your explanations of various subjects. Here is one for you:
With all the talk about deficit reductions, with numbers floating up to $4 trillion, it seems we won't be making any dent at all. How will we reach a balanced budget? Here is how the numbers seem to look, if one were to delete eight zeroes and pretend this is family budget (as someone explained to me):
- Annual family income: $21,700
- Money the family spent: $38,200
- New debt on the credit card: $16,500
- Outstanding balance on the credit card: $142,710
- Total budget cuts so far: $3.85
Can you throw some light on this subject please?
Paul Solman: One of the most difficult things to explain, it seems, is the fundamental difference between a family's budget and the budget of a country. If a family borrows more than it can ever pay, it goes bankrupt. By contrast, if a country does, it can always tax its citizens more.
One way to think about it: collateral. So imagine, for a moment, that my wife and I keep borrowing more than we earn, though in fact we've been lucky and careful enough never to have had to. But just suppose. What would happen?
Eventually, the interest we paid on our debts would mount. That's because running a deficit entails an ever-greater cumulative debt load, on which we'd have to pay interest, which would add to our budget shortfall.
"Ah yes," you might say, Heena: "exactly like the U.S. government." But no, not exactly at all. This may be an outlandish point, but consider just our respective real estate holdings. My wife and I own 8,000 square feet, less than one-fifth of an acre. I consider our spread extravagant, having lived in rental apartments from birth to age 35. But compare our lot to the acreage of the United States. The U.S. owns 650 million acres of public land. Since the total U.S. debt amounts to about $16 trillion, if you include the money we owe to our own trust funds (Medicare, Social Security, etc.), the U.S. has borrowed about $20,000 worth of debt for every acre it owns. For my wife and I, with our fifth of an acre, that would mean carrying about $4000 worth of debt. Manageable, wouldn't you say?
Another point. If we need money to pay back our debts, my wife and I can ask our fellow Americans to help but we can't very well demand the money, under penalty of law. But Uncle Sam can -- and does -- by taxing his 309 million nieces and nephews. There's almost no limit to how much he can raise this way.
The bottom line is this: a country can draw on all sorts of wealth that a family cannot. It is troubling that we have not, in recent years, used our wealth to pay our bills -- having spent far more than we ask our citizens to pay for -- and made up the difference by borrowing. But lenders must think we'll be good for the money. They've certainly been willing to lend at low -- in fact, historically unheard-of -- interest rates. If we were a family, however, with the kind of debt numbers you mention in your email, we'd have a credit score so low, our lender of last resort would be the local loan shark: the one who collects from deadbeats with an appeal to one's knees. The United States is not in an analogous position.
As to what's going to happen to the U.S. budget, it beats me. But we'll begin to see soon enough.
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This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions.