Politicians in Washington D.C. sometimes make the issue of whether or not we raise the U.S. debt ceiling sound like an essential and complex challenge, one that only their particular brand of political maneuvering, posturing and compromise can rise to meet. But from what I can tell, there's actually some fairly simple financial math involved, and the implications for the state of our nation are fairly straightforward.
But more importantly, the conversation about raising the debt ceiling is the wrong conversation to be having.
I'd like to present those observations, but instead of referring to "the U.S. Government" every time, I'll just refer to this guy "Sam."
Please tell me if I'm wrong or over-simplifying:
- Sam consistently spends more money than he makes. This means that Sam will always be short on cash, and that his lifestyle is by definition unsustainable.
- In order to keep living the life he wants to live, Sam makes up for being short on cash by borrowing money from his neighbors. Sam has found a lot of different neighbors who are willing to loan him money, and he's always reassuring them that he's good for it.
- At some point, even Sam recognized that he couldn't just borrow money without limits, so he set up a maximum amount of money he wanted to owe to his neighbors at any given time. He called it his "debt ceiling."
- But over time, as Sam got even more used to his lifestyle and didn't bother to fix his inherently unsustainable cash flow, he realized he'd set the debt ceiling too low. So he raised it! After all, it's just his own self-imposed limit, so he can tweak it a little here and there and then lower it again later. It's similar to Sam's friend who has a problem with alcohol abuse but always thinks he can handle one more drink when out at the bars. Sam has raised his debt ceiling 10 times already.
- Sam's friends (some of them experts in financial management) have tried to convince him to stop spending more than he makes so that he doesn't have to keep borrowing money and raising his debt ceiling. But this way of life is so enjoyable for Sam (at least when he's not worrying about the neighbors he owes), he's forgotten any other way to live. Sometimes Sam gets angry when his friends and neighbors won't leave him alone about his spending habits. A few times he's used physical violence (or the threat of it) to get some of his lending neighbors off his back for a bit. Some people say they've seen Sam outright stealing from others to pay his bills.
If Sam were a person, we'd know that he is on his way to some pretty serious lows in life.
Bankruptcy, losing family, friends and neighbors, health issues, homelessness and possibly violence or early death. Maybe someone would stage an intervention, maybe he'd get help after a close call, but maybe not.
But we know that Sam's financial habits don't work, aren't sustainable, and aren't to be emulated. Sometimes, we know that it's only by hitting bottom and facing these hard realities head on that someone with a problem like Sam's can actually begin to rehabilitate himself.
It seems unfortunate, then, are we willing to allow our representatives in Congress to distract us with a conversation about raising the debt ceiling AGAIN because "there is no alternative," knowing full well that it just enables the government to defer confrontation of its unsustainable way of operating. All of the back and forth about who wants to cut what spending, who will get taxed how much, etc. is political theater, hand-waving and misdirection so that we don't pay too much attention to the underlying problems.
Would a good and helpful friend of Sam's indulge him in a long conversation about whether to raise his limit on borrowing today or next week, or whether he should continue his unsustainable spending on this restaurant or that piece of clothing? When Sam says, "C'mon dude, get off my back, I'm just trying to have some fun here," would we lay off? No, a good and helpful friend would shake him by the shoulders and say (or scream) "Sam, you've got to find a new way to exist that doesn't require you to perpetually borrow money from your neighbors."
Unfortunately, as U.S. taxpayers, we're all affected by and responsible for Sam's actions. He's family, and the harm he does to himself is harm he does to us. Are we going to let Sam go on this way, or are we going to intervene and make Sam try something different?
(Thanks to Planet Money for this explanation of the debt ceiling that inspired this post.)
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I'd suggest a couple minor changes to your analogy (to make it a bit clearer):
- "Sam makes up for being short on cash by [using his credit cards]"
- "Sam recognized that he [had maxed out his credit cards]"
- "he realized [his credit limits were] too low" so [he had them raised] / [he got more cards]
In light of this, something to consider:
David Cay Johnston (a journalist I admire, author of "Free Lunch" and "Perfectly Legal", as well as recipient of the Pulitzer prize, and a former contributor to the New York Times) wrote an article for Reuters recently about how NewsCorp (Rupert Murdoch's media empire) received a $4.6 billion TAX REFUND last year, despite having ~$10 billion in what should have been taxable revenues (which would have been ~$3.6 billion in taxes owed). That's a net loss of ~$8.2 billion tax dollars that we citizens have to make up to pay for our programs.
In essence, we tax payers just paid Rupert Murdoch $8.2 billion.
The super-rich, the corporations, all of these entities with deep pockets that donate to the politicians have been getting subsidized by the taxpayers in this way more and more over the past 30-40 years, particularly in this past decade.
Sam may have a cash flows problem, but it's because he keeps giving his money away to smooth-talking snake oil salesmen. If we want to address the real problem, deal with the elephant in the room.
I think you need in there a line or two about how Sam has a lot more money than he owes, he just refuses to use his available assets to satisfy his debts. By keeping tax rates artificially low, Sam has made the decision that he'd rather spend other people's money than his own.
Alternatively, another metaphor (this anthropomorphizing of government only goes so far, of course) is that the historically low tax rates on the wealthy represent a decision by Sam to voluntarily decrease his income by working less or, maybe, taking a much lower paying job so he can find himself.
I'm still not clear on what you're proposing. Sam isn't just "family" for us. He's the breadwinner and the lifeline for lots and lots of people that will be in serious trouble without him and his support.
If your solution is not to raise the debt ceiling and be optimistic that Sam can solve his problems, I think that's naive. Many of the same people proposing no increase in the debt ceiling are the same that have proposed the policies (tax cuts!) that cause the need for us to need the increase of the ceiling in the first place!
John - of course they need to figure out what to do this time around, and it will either be raise the debt ceiling (most likely) or cut spending significantly (less likely - the planet money article estimated a 40% cut being necessary) or some combination.
I'm just calling out how ridiculous it is that things even got to this point, that we've been here before, and that everybody's pretending like this is just some natural part of government finance when in fact it's symptomatic of a seriously diseased approach to financial management. But I didn't want to try to cram in "Chris's 12 Steps for Reinventing the Federal Government" right at the end there.
40%!!!!!! These cuts (or tax increases) aren't made in a vacuum. We need to balance deficit reduction with the effect of such massive cuts on an already flailing economy.
For example...
http://www.nytimes.com/2011/07/11/business/economy/as-government-aid-fades-so-may-the-recovery.html
We're in for a bumpy few months/years. I don't think deficit reduction should be the top priority.
I respectfully disagree with the whole premise behind the analogy. My suggestion is to rename Sam, a lone individual, to We-n-Us.
When Sam stops spending to pursue his own goals, his neighbors don't become directly or indirectly unemployed and Sam's income doesn't, first, stop growing and then contract. However, We-n-Us is affected by artificial limits that don't apply to Sam, the neighbor.
I'll now drop my own analogy to come to the point. As we're seeing today, not for the first time, that the highly selective, hysterical responses to our government's spending at this point in our nation's economic reality refute the individual homeowner budget fallacy. The only fair comparison is that both the government's and the individual's fiscal health includes input from both sides of the ledger, income (revenue) and expenses. The hyperbole surrounding the "debt ceiling" distraction is based on two flaws; fear of inflation, (hyperinflation for the seriously disturbed) and the equally unrealistic claims that cutting back spending at this time will produce economic growth.
Today, it's no secret that corporations, (you know, those entities that pay a smaller percentage of their income in taxes that you or I), have ample cash supplies, but no consumer demand. Incredibly, many Americans are accepting what should be quickly seen as ludicrous the con that uncertainty -not lack of demand - is holding back growth. With the blind enthusiasm now in vogue to slash government spending, (almost exclusively in programs that affect those consumers who make up the domestic market), we're getting what should have been predictable three years ago, consumer demand is rapidly dropping and unemployment, needlessly high for the past two years, is and will reliably continue to remain, if not grow worse.
Sam can't spend enough to reverse this downward spiral, but government can. This isn't to say that fiscal discipline should be tossed out with the bathwater, but it does mean that now is the worst time for government to contract its spending, including debt spending, if it expects to generate an economy in which Sam will soon loose his job, and thus, the means to pay his own debts.