As I’m posting this, President Obama is supposed to be addressing the nation (OK, those of us who can watch a speech at 1:35PM on a weekday) about the federal budget. The US government has been spending more than it’s been taking in for years. The question is what to do about it.
Pundits often like to compare the government’s finances to a household. Usually, the comparison is basic: we have to balance our household budgets and the government should balance its, too.
But I think there are some more intriguing parallels. For instance, the happiest way to get out of a hole is for a lot more money to start rushing into either a family’s, or a government’s coffers. Unhappily for governments, this is often not quite as simple as raising tax rates — and indeed, higher tax rates often have the opposite effect as intended as people work less and use that extra energy to invent ways to avoid paying taxes. What does raise revenue? A rapidly growing economy. Basically, any fiscal situation is solvable if the US started growing 5-6% a year. Obviously, a massive boost in income is hard to figure out, for both families and countries. But the payoffs are really great when it happens.
What if it doesn’t? Then we get to the question of cutting. The past few months have been almost farcical, as politicians talk about rooting out earmarks, fraud, and maybe hacking foreign aid or NPR. This is like a family with a swelling adjustable rate mortgage and a huge credit card debt getting excited over whether someone used a 50 cents off coupon at the grocery store. Non-defense domestic discretionary spending amounts to a pretty small percentage of the US budget, just as groceries and entertainment are a small chunk of a family budget.
Long term, to get serious about finances, you have to look at the big stuff. For most families, this is housing and transportation (amounting to roughly 50% of expenditures for people of all income brackets). For the government, this is defense, Social Security and Medicare. As with households, changing the big things is difficult — which is why we’re always tempted to look at the coupons. But it’s kind of silly to have a discussion about money without looking at where the money really goes.