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Still Trying To Make Sense of US Finances

I talked to an accountant friend of mine, because I was concerned about potentially misunderstanding what I’ve read about the state of the US Federal budget, national debt, current and planned expenditures.  In my earlier post on this subject, I couldn’t help but feel that I was missing something.  These numbers are so darn big, it’s really hard to attach meaning to them.

So, I kept thinking about it.

And then I thought some more.  What if there was a way to translate this into something more meaningful to present day life for the average Joe.  After all, I consider myself an average Joe.  I don’t have millions of dollars in the bank, vacation homes in Kennebunkport and Hawaii, or drive a Bentley.  Consequently, when I read about trillion dollar debts, budgets, and deficits, my eyes kind of glaze over and I have a hard time envisioning scope.

So, I did a little exercise, as though I were back in linear algebra class.  I decided I’d see if I could put things into proportion by mapping some of the numbers into a different space.  What space?  The space that the average family lives in.

Here is what I did:

I looked at the current debt (difficult because it won’t stay still) and fixed it at $12.4T.  I then looked at what the projected federal tax revenue is for 2010. I went with the more optimistic estimate of $2.2T, although I did find references to less optimistic figures here.  Then I came up with a ratio, current debt/projected revenue.   The result is 5.64.  In other words, if we were to stop ALL federal spending and freeze the debt (no interest to anyone), we could pay it off in less than 6 years!  I don’t think we could get away with completely stopping the federal government, though.

So, wow! Gee that might not be so bad.  5.64 is a number I can think about.  So, I continued my little exercise.  I decided to make a hypothetical family budget, with a hypothetical median annual income of $55,000.  (Actually, according to recent census data that figure is a little high, but heck, I figured I’d err on the conservative side to see how this would work out.)

So, my happy little hypothetical family is earning $55,000.  Now let’s put them in a similar financial situation to that of the federal government and see where they end up.  They need 5.64 times this income in debt to make things equivalent.   Voila, that’s $310,432.   Ouch!  That’s a lot of debt for a family making $55K.

But, wait there’s more.  Recall, above I created by ratio based on current debt.  Let’s do some further extrapolation.  Projected federal debt in 2010 is going to go at least (being conservative here) up to $13.786T.  Hmm, guess our family has some other expenses.  They are going to have to borrow in order to meet them.   This will increase their debt by another $40,825.  At the end of the year, they’ll owe $351,257.  In other words, they spent 74% more than they made.  How did I get there?  Well, if we assume similar proportions and the government brings in $2.2T and spends $3.833T, that’s 74% more than they took in.  I guess that’s what they call deficit spending.

Here’s what their budget might look like:

House Payment $16,532.27 30.06%
Utilities $4,000.00 7.27%
Student Loans $2,750.00 5%
Car payment 1 $6,000.00 10.91%
CC Payments $5,000.00 9.09%
Health Insurance $5,500.00 10.00%
Car Insurance $3,000.00 5.45%
Food $6,000.00 10.91%
Misc Expenses $6,217.73 11.30%
Other Stuff $40,825.00
Total Yearly Outlay $95,825

Gosh, this family isn’t very fiscally prudent. Remember the rule of thumb – before mortgage insanity – when the price of your house was not supposed to exceed 3 times your annual income?  I guess they have a lot of credit card debt.

Hey, we can still have more fun.  I was struggling on how to map government expenditure to what a family might have, especially what to do with those unfunded liabilities – social security, medicaid, and prescription drug.

These are currently at: $14.1, $18.7, and $74.6 trillion dollars.   What happens if we do our handy ratio trick.  Say, create a ratio between what the government brought in compared to what the value of this unfunded liability is.  In other words what it has promised to pay.  My accountant buddy, K, suggested that an unfunded liability was not dissimilar to alimony.

So, let’s say Joe, the head of our financially troubled fictitious household was married 3 times before finding “the one”.  By our logic, he will owe, over the next 48.9 years $354,623 to wife 1, $469,170 to wife 2, and $1,865,868 to his third wife.  Of course, he’ll have to abandon his budget and put ALL his money toward making these payments for the next 49 years or so.

What was this “logic”  well, if the government has unfunded liabilities (alimony) of $14.1T for Social Security, that’s 6.44 times what it will bring in in 2010.  By that same math, Joe earns $55,000, if we multiply that by a factor of 6.44, we get his alimony payment to wife number 1.  We can just do the same exercise with wives 2 and 3.  After all, it’s only fair.  We can’t deprive them of their alimony, can we?

Oh, well.  I tried.  It’s still ridiculous!  It doesn’t add up even when I bring the numbers down to what should be a “reasonable” scale.  So, now I’ve gone to all this trouble, hurting my brain, trying to make this make sense on the level of the average American household.  Any way you look at it,  our Joe’s family is worse than bankrupt.

Unfortunately, I think our government is too.

1 comment

1 TheDave { 02.27.10 at 1:43 am }

For so long the conventional thinking seems to have been that the budget deficits haven’t really been worth doing anything too painful to rectify. I think in reality the nations problems aren’t so much of specific Presidents and Congresses actions but rather lack of them. The last number I saw was that over 60% of the federal spending is on autopilot. Democrats refuse to curb benefits, Republicans don’t want to raise taxes and we slip closer and closer to disaster. Medicare and Social Security, while having become very popular are two of the biggest offenders of the autopilot growth. The deficits from Medicare are projected to grow from 516 billion to 932 billion over the next 8 years, and social security from 581 to 966 in the same time frame. Am I saying that we need to start cutting from these. No, I’m not learned enough to suggest such a thing, I’m just pointing out the facts. Hey, I have an idea – lets start another government organized program for health care! That’s sure to fix it. I guess it’s more popular to deal with the health care issue than to battle the budget.

Is it already too late? I honestly don’t know, it may be – but my fear is that even if it’s not it won’t become a priority until we pass that breaking point of “too late”.


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