The Roof is on FI-YA!!!!!!!!

Over the last months, the topic that has dominated the political debate is the debt crisis. There are 2 ways to go about fixing the debt. The president’s plan consists of raising revenue mostly in the form of tax increases. People who agree with this position state that tax rates are the lowest they have been in decades and in the wake of this financial crisis more revenue is needed. The position of the Republican Party is to cut spending. They site the years of waste and irresponsible spending as the cause of this problem and the cutting of spending as a remedy.

Many politicians use the example of American home owners as a way to describe the economy. While I think this is not always an accurate picture I think the idea of a house and managing a household can point out some things in the current economic arguments. In this article I will use three practical house hold examples to try to explain my feelings on this topic.

Before I go any further let me state that I have viewed our national debt as a HUGE problem for quite a while. I was one of the people in my college years screaming about the national debt clock. I was the crazy liberal blowing a stack when George Bush was spending this country into oblivion. I have written several times on this blog about the unfunded liabilities that the government has obligated itself to pay. I have stated many times that the current trend is unsustainable.

I. TERMITES

Imagine this scenario. You are a single person and you live alone. You are driving home at night after having dinner with a friend. While you are driving you remember that you once again have forgotten to call TERMINIX because you have a very severe infestation of termites. You have been putting it off for ages but you resolve that this time you are going to get to it. You make up in your mind that the first thing you are going to do when you get to the door is you are going to call TERMINIX and leave a message on the machine. As you turn the corner and enter your development, you get the sense that something as not quite right. As you turn down your street you notice a glow in the darkness. You then notice something smells like smoke. To your horror you realize that it is your house that is on FIRE!!!!

At this point there are many things you could do. Your first instinct may be to run into the house and try to save your cat or dog. You may have the urge to try to retrieve important documents like your passport or your birth certificate. You may think of your prized possession that you do not wish to be destroyed. After about 20 seconds you realize that the most practical thing you can do is to call the fire department.

You may be wondering what your house burning down has to do with the economic picture I painted in the introduction. I would equate the house with the national economy. The fire is the problem of unemployment. I believe the fire is also the result of several systemic (not cyclical) problems in the economy. The termite infestation in this analogy is the national debt. The point of this analogy is that if your house is on fire your first priority is to put out the fire and not to worry about the termites.

The GOP position is to stand outside watching their house burn to the ground and they are on the phone making an appointment with Terminix instead of CALLING THE FIRE DEPARTMENT AND PUTTING OUT THE FIRE. That is how silly this debt debate is when the economy is ON FIRE!!!! In this analogy the water that will be used to put out the fire is going to be the money that we have to spend to fix the systemic unemployment in this economy. In this context the whole debt argument is silly.

Make no mistake, THE TERMITES WILL EAT OUR HOSUE VERY SOON. Our termite problem is magnified because for the past 30 years we have completely ignored our termite problem. Since the mid-1980s the termite problem has grown unchecked due to the irresponsibility of BOTH political parties. For 30 years we have said “we will deal with the termites next year”. In this context you may be asking “How much longer can we wait before we deal with the termites?” I submit we have to put it off one more time because the HOUSE IS ON FIRE!!!! The solution therefore has to have a short term and a long term component.

We are going to have to spend money this year. PERIOD. We are probably going to have to spend money next year. We have to fix the unemployment problem. I believe that this problem is systemic and not cyclical. This unemployment is not due to the normal cycle of the economy but is rather systemic because of a whole list of factors. I will explore these forces in a later article. The trick is since we have to spend this money we need to spend it on things that will have gigantic long term impact. We have to get a huge long-term “Bang” for our “bucks (that we don’t have). I suggest education and infrastructure spending. When (or IF) our economy recovers these things will add to the value of this country and make the individuals in this country more prosperous. This approach fixes the short term and helps us in the long term. But we are going to have to spend. We also have to spend this money with the idea that we are very soon going to have to deal with the debt. We have to put out the fire in a way that in a way that will allow us to come back and fix the termites.

II. NO MONEY, NO MORTGAGE – The difference between debt and deficit

The housing market is another thing that is often in the news. Many politicians compare how people run household budgets to the government. The argument is “if a family doesn’t have money they have to go without and the government should do the same”. I think this is a very flawed analogy for several reasons.

In order we to more clearly define this analogy it is necessary to first define the difference between debt and deficit. The national debt is the total amount of money that we owe. This number is cumulative. This is a long term measurement. Every year the country either takes in more money then it spends or it spends more money than it collects. This results in an annual deficit or surplus. This annual deficit or surplus is added or subtracted from the total debt. The important distinction for this analogy is that there is long term debt and there are short term deficits and surpluses. I like to relate this issue to the idea of buying a house.

When most people buy a house they usually don’t walk into the realtor’s office, put $300,000 on the desk and walk out with a house. Most people get a house via a mortgage. You put some money down and then over the course of 30 years you pay off the house plus interest. You have a 30 year long term debt. When running a house hold you also have monthly short term surpluses and deficits. Hopefully your household has more short term surpluses than deficits. In reality, this may not always be the case. Sometimes someone gets sick. Sometimes you crash the car or you have to buy a new car. Sometimes you send your kids to college and the tuition goes up 300% in 4 years. Sometimes you splurge at Christmas because your kid wants a power ranger. When these things happen you have 2 options. You either have surpluses from past months saved up or you will acquire some short term debt (usually credit) to pay for these things you need or want. The point is you still have 30 year long term debt and your debts are surpluses are added to the debt.

The GOP position is as it relates to the deficit is like saying” I have a mortgage so I am NOT GOING TO BUY ANYTHING ELSE FOR 30 YEARS!!! No Christmas presents. I am going to drive the same car for 30 years. The house burns down. Too bad, we have debt we have to be homeless. Car breaks down too bad. We aren’t spending any more money till we pay off our mortgage. The roof is leaking. Too bad we aren’t spending any more money. Because we have long term debt we can’t have anything else. The problem with the economy is there is no demand. The buying power of the middle class has been weakened so companies are selling less. That is why unemployment is persistent. So guess what. In the near term we are going to have long term debt and we are probably going to have short term deficits. Who wants to go back to the Clinton days where we had an annual SURPLUS???

Another thing that came up in the debt talks was a balanced budget amendment. This is the idea that we amend the constitution to require a balanced budget. The question I ask is “Why didn’t the framers of the constitution make balancing the budget as a requirement?” I think it is because the founding fathers realize that STUFF HAPPENS, and when stuff happens you need to run a deficit. There is a reason that the constitution doesn’t say anything about balancing the budget because the founding fathers were some pretty smart people.

GET A FREAKIN' JOB - spending vs. revenue

Sometimes house holds get into financial trouble. Households may be in a position where they don’t have enough money. When this happens there are TWO courses of actions that people can do. The first is to cut spending. You go without. You buy what you need and not what you want. You cut back. After you cut back and you still are not making it the next thing you do is you get a second job. You work nights or weekends. You work overtime at the job you have. In other words you RAISE REVENUE!!!!!!!

The GOP position is to not raise taxes for any reason. In fact their approach has been to cut taxes while at the same time complaining about our short term deficits and our long term debts. This course of action is akin to taking half of your paycheck THROWING IT OUT THE WINDOW and then complaining to your neighbors how much you have to cut back just to survive.

--

The bottom line is this. Revenue makes up 15% of GDP. Spending makes up 25% of GDP. If we are going to balance the budget in the short term these 2 numbers have to be equal. To get rid of the long term debt, the revenue number has to be higher than the spending number. But just like the second household analogy we can’t just stop spending money. Closing this 10 percentage point gap at first glance may not seem that drastic until you consider that 10 percentage points is almost half of the total amount we spend. Think if you had to over night cut your expenses in half. Think of what it would be like if you could only by half of what you are buying now. For those of you who think the government does nothing for you I would like to ask you a series of questions. Did you built the road that you drove to work on or did the state build it? When you cooked your eggs this morning did you by a salmonella kit and test your eggs or did you assume that the FDA tested the eggs and they are safe? If someone breaks into your house, do you hire your own team of vigilantes or do you call the police that the state pays for? If someone owes you money, do you hire a muscleman to break the person's leg or do you use the court system which the state runs? Do you have a power generator in the back yard or do you use the power plants that our collective efforts help to build? Contrary to popular belief the government actually does stuff and to cut spending in half overnight is not reasonable. The only way to close this gap is with a balanced approach. The truth is we have to spend less but we also have to raise more money. A balanced approach is needed but WHEN we spend or save is equally important as WHAT we save.

A balanced approach is what is needed to get out of this problem. Are there wasteful parts of government that need to be curtailed? Of course they are. I am not advocating big government for the sake of big government. I am saying that government has a responsible role to play in our lives. To start an argument with the premise that all government spending is wasteful is not realistic. At the same time we have to raise revenue. Any attempt to raise revenue is not necessarily a communist Marxist plot that will destroy America. Sometimes it is just simple math. I think the solution lies in the middle. Put out the fire, get a second job, and don’t be afraid to spurge a little at Christmas!