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What Can We Learn From The Debt Ceiling Debacle?

in Money Basics, Pay Off Your Debt, Rants

First viewed this awesome cartoon on Reddit.

Note: This is a post from Adam Baker, founder of Man Vs. Debt.

The Debt Ceiling.

It’s been around for almost 100 years now, but few of us really knew much about it before the last three months or so.

Originally created so that Congress didn’t have to approve every individual expense of World War I, it’s now turned into an extremely polarizing and extremely dangerous piece in the United States’ financial puzzle.

[Read more about the debt ceiling’s origins and history on Wikipedia]

Here’s the bottom line: The United States is financially screwed if we don’t make drastic changes in the next five to ten years.

I haven’t met very many people who disagree with that fact. For decades we’ve been “letting ourself go” financially. We’ve been pushing the problems onto the next Congress, onto the next President, and onto the next Generation.

One of the best resources – of any type – that I’ve seen in the past few months is this video:

Pretty scary stuff right? If you have a few minutes today, you should really watch that video (and share it with your family and friends)!

Note: Want even more food for thought? Did you see the recent CNN Tech article claiming Apple now has more cash than the U.S. Government? I don’t know whether to be depressed at the government or wildly inspired by Apple – probably both.

What if the U.S. Government were an American Family?

This comparison has been done in several places before, but it’s a great exercise for visualizing the enormous debt levels we face in this country.

The estimated numbers (according to Wikipedia) of the 2011 budget show that you U.S. will bring in around 2.17 trillion dollars, spend around 3.82 trillion dollars, and currently carries over 14 trillion in debt.

But what happens if we divide all these numbers by $50 million dollars?

Imagine a young family with the following numbers:

  • They earn $43,400 per year.
  • But spend $76,400 per year.

That means they spend $33,000 per year more than they earn! Ouch.

Even worse, the currently carry $280,000 in debt. They are trapped, buried, with several huge changes needing to be made to fix their situation.

So, after much arguing, they devise a plan to eliminate an average $1,834 per year for the next ten years.

$1,834 a year…  from the $33,000 a year they need just to break even! Nice plan.

They realize that just cutting the cable out of their budget (about $153 per month) may not do the trick, so they also agree to make a plan sometime soon to eliminate another $3,000 per year (over the next 10 years) – but they need time to argue about it more before they decide what to cut.

Over the next ten years, if this young family play theirs plan out perfectly (no hiccups, no increased costs, no new fights with neighbors, no disasters) then they’ll get to break even.

But over those ten years, the debt will continue to skyrocket each year – adding more and more weight to their struggles – and more and more payments to the interest on that debt. That’s assuming they can find people that’ll keep lending them money!

It’s not enough…

I’m going to blame both parties here. I’m afraid we haven’t done enough.

We’ve got to cut spending much more dramatically. Yes, that includes finding ways to cut Social Security, Medicaid, Medicare and other bloated programs that help the nation’s most poor. And, yes, that means cutting our military spending, too.

Sorry to say it, but we also have to raise taxes. While I’m all for smaller government and lower taxes – we simply can’t dig out of this hole with spending cuts alone. We bear the burden of the generations of low taxes and high spending before us.

If it were up to me (it’s clearly not), I’d favor a 2:1 ratio. We’d cut twice the spending (as I believe our spending is our core problem) than we would raise taxes – but we’d still do both.

We’d do it hard and fast. We’d do it starting in 2012.

The current solutions aren’t big enough. They aren’t fast enough.

So what can we do?…

No matter how great I think my plan may be (3 trillion in spending cuts and 1.5 trillion in increased taxes per year for the next 5 years), I know it would never fly in Washington. It’s too unpopular – and would hurt everyone (the poor, the middle class, and the wealthy).

We are going to have pain, folks. Pain now, or pain in ten years. It’ll come.

The best way to minimize the pain?

Use this debacle to FUEL your own balanced personal economy.

The primary thing you can do to fight back is to get your own house in order.

Aggressively design your financial life to be free, flexible, adaptable. I don’t know what the future holds, but I know this debt ceiling stuff is just the tip of the iceberg for the changes we will have to make.

I realize a decent portion of my audience is international, but this still applies. If the U.S. or any other major world economy or two start really hurting (some are already on their way) it’ll affect all of us.

In this day and age, we should already have  enough motivation to aggressively attack our finances, but let’s use this as even more fuel.

Mad at your government’s handling of money?

“Be the change you want to see in the world.”

Show them how it’s done.

{ 60 comments… read them below or add one }

Glen Craig August 23, 2011 at 11:25 AM

It’s really ridiculous how no one wants to be the “sucker” that has to pay attention to their finances rather than get to spend wildly. We need a fundamental change in our thinking in this country. We can’t just use, use, use and expect the fountain to keep pouring. There was a time when we actually had a budget surplus (not long ago). We can get there again but we are all going to have to give up some.

Interesting that Apple has more dough than the US. Maybe they should buy the US? Then we can have a cool iGovt and vote via iTunes.

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Baker August 23, 2011 at 5:34 PM

I’d laugh at the voting via iTunes thing – if it weren’t such a realistic possibility in the future! :)

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Siyo August 23, 2011 at 6:14 PM

hahahaha vote via iTunes….I can dig it!

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Eric @ Debt Snowball Calculator August 25, 2011 at 2:06 PM

Haha, that’s great! It is sad that a company can have more of an emergency fund than a national government.

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Wojo August 23, 2011 at 11:26 AM

Wise conclusion–I think given the environment of today, the best thing anyone can do is remain flexible enough to make drastic changes in our life based on outside circumstances we don’t yet know. The ones that end up going down with the ship are the ones that didn’t find their life vest when they had the chance.

(Not saying the ship is going down, btw. I still have much hope.)

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Baker August 23, 2011 at 5:35 PM

Yep, even if you trust the ship to float for a long time – you still have an evacuation plan!

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Shane August 23, 2011 at 11:32 AM

Adam,

You definitely hit the nail on the head here on a few points. It is actually a multi-faceted approach that we need here and while everyone wants to point fingers the fact is, both sides need to give up a little.

The thing is – - people forget basic financial economics. In the 1940′s our country was actually 145% above GDP and we were in massive debt. And what did we do? We raised taxes and then spent to build the national highway system…..seemed crazy at the time but what happened was a massive influx in employment and guess what? Spending by consumers!!

The issues here are just really complex because on the one hand you have the debt management to deal with, the revenue issue which needs to occur, and the unemployment – - and while I am doing a big project currently called “Rethink Work” to highly encourage people to work for themselves, there are still those that need traditional 9-5 stuff…..

Anyway – - thanks for the post because I agree, we need to do something and not next year but right now.

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MD August 23, 2011 at 11:40 AM

I agree with your sentiments of being control of your own destiny. I hate it when 22 year olds are stressing about the economy. Sure it is a major a problem. However, what are you doing to improve your own situation? Are you aggressively paying off your debt? Are you trying to get rid of your junk? The decisions made in Washington won’t help or hurt you if you can’t master your own situation first.

Thanks for the reminder.

I hate when my favorite bloggers rarely post! Btw I’m re-watching the partnership session.

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Tyler Tervooren August 23, 2011 at 11:45 AM

Can’t remember who said it, but:

“The clever try to change the world. The wise try to change themselves.”

Adam, I think you’d enjoy the book “Justice: What’s the Right Thing to Do?” I’m reading it right now and it talks all about these kinds of dilemmas and the big disconnects between simple philosophy and the real world complexities that cloud our judgement.

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Danny August 23, 2011 at 11:51 AM

Nice post. I agree that it all starts with our personal economy and getting our own houses in order financially. Are you a part of Dave Ramsey’s Great Recovery? We are trying to be tighter with our budget and getting rid of all debt (working on mortgage now) and saving money.

I also believe as you say that there will be pain with the national debt situation and it is probably better to take the pain now over the next 10 years than face a potential Great Disaster (worse than a depression) later. I just think the extreme deficit is leading to a situation beyond repair except by great pain for millions around the world.

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Baker August 23, 2011 at 5:36 PM

I’m not part of the Great Recovery project by Dave Ramsey, but I’ve heard some things about it. I’ll check it out in the future. :)

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Amanda August 23, 2011 at 12:04 PM

I think this is one of the best summations of the debt crisis I’ve read. It’s simple to understand and not partisan in the least. I also think that your solution is spot on. It seems that no one has the guts to say that we actually need to swallow this double-whammy of a bitter pill of reducing our spending AND raising taxes. I sincerely hope that we can make this happen. Great post.

BTW, it’s good to see you posting again. I really enjoy your site.

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Baker August 23, 2011 at 5:36 PM

Thanks for the kind words, Amanda.

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Paul Williams August 23, 2011 at 12:11 PM

Hmm, maybe the world governments should call for a mulligan and start all over. :)

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Paul Williams August 23, 2011 at 5:41 PM

I said this because as I was watching the video you embedded I got to thinking…if the US economy collapses and then all the world economies collapse, where does that leave us? All in the same boat. We’ll still be alive, have our skills & abilities, and the resources available to continue doing most of the things we’ve been doing – and certainly the things required for survival. So perhaps the financial system collapses, but that’s only the end of the world if these “flash robs” and riots take over…

At the end of the day, I’m just glad I’ve got my hopes set on something higher. I don’t need to fear what they fear. I don’t need to be frightened. :)

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Adam Kayce August 23, 2011 at 6:54 PM

Interesting… reminds me of an article on the age-old concept of the Jubilee: http://www.yesmagazine.org/23livingeconomy/hudson.htm . Ancient wisdom for a modern age.

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Adrian August 23, 2011 at 2:33 PM

Put some more detail on that “American family” and suddenly the conclusion is quite different from the one you make:

http://www.adrianliston.eu/blog/2011/4/21/us-debt-divided-by-one-hundred-million.html

Quite honestly, though, the whole analogy is stupid. Families should spend in a cyclical manner, governments should spend in a counter-cyclical manner, and more importantly, governments are not families.

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Baker August 23, 2011 at 5:37 PM

The analogy is to put the numbers in perspective. The sheer size of the number can make it hard to understand what a 9.17 billion cut over tens years. It’s easier to relate to how far we still have left to go – doesn’t seem stupid at all to me!

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Erik August 24, 2011 at 3:26 AM

The analogy doesn’t serve to put things in perspective at all, it confuses the basics to the point of being directly harmful. I understand it’s tempting to make this comparison, but one needs to grasp a few key insights that show the difference between governments and any other player in the markets (individuals, families, firms, whatever):

1) Taxes do not serve to raise revenue for the government. Collecting taxes serves the purpose of offsetting the effects of government spending – fighting inflation. (The composition of the taxes can also be designed to alleviate inequalities in distribution.)

2) Government bonds and other debt is also not used to raise revenue, or “borrow”. It is an instrument for the central bank to control rates, drain bank reserves etc.

1 & 2 gives us: Government is NEVER revenue constrained, it can be constrained by things like inflation targets and other such policy decisions. If we had high inflation or inflation expectations (which we absolutely don’t, we have high unemployment)… then, and only then, would I agree that there is a need to reign in deficits.

This is a vital insight in country that issues its own currency with a floating exchange rate!

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Alex Humphrey August 23, 2011 at 2:36 PM

The problem with raising taxes is to do it would require the government to tax the bottom half of Americans that aren’t taxed federally. That would greatly increase the tax revenue but (as you said) would be unpopular.

Why not tax the rich? Because the rich already pay the lion share of taxes. Their “fair share” is being paid and then some. Plus, increasing taxes on the top 5-10% wouldn’t come close to covering our debt and they have vehicles to get around taxes (off shore accounts, Trusts, etc).

As for spending cuts, that needs to happen as well. I’m glad you pointed out that medicaid, medicare, social security, and the military are all going to have to take a hit. The truth is, massive sectors of government are going to have to be shut down to avoid this. People who we love (including ourselves) will feel the pinch of this change. But as you said, it is the only way.

We got really close to this at the last debt ceiling debate. Although there wasn’t a whole lot done (lets be honest, saying they’ll cut spending doesn’t actually mean anything) it is a great starting point and proved that some in Congress are willing to fight hard to start to get this right.

My hope is that the next election ends with more Senators willing to make those hard choices and with a President willing to take massive cuts out of the overly inflated budget.

It’s going to hurt. It’s not going to be fun. But it is the best thing the government can do for us.

And the American people need to be making these sacrifices as well. The Government won’t change until we do.

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Jason Cabler (@DrCabler) August 23, 2011 at 3:03 PM

Absolutely! We need to make sure we have our own finances in order no matter what anyone else is doing. We all want the government to get itself in order but most of us are in debt as well.

We have to change our mindset as individuals and as a nation if we’re ever going to crawl out of this hole and continue to be the great nation that we’ve always been. It takes common sense, hard work, and sacrifice to get there but it can be done and it’s well worth it.

I teach this constantly in my Celebrating Financial Freedom course. These concepts change lives when people make the effort.

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stephen August 23, 2011 at 3:17 PM

“Be the change you want to see in the world.”

Just so we are clear that is a quote from Mahatma Gandhi and not this author.

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Baker August 23, 2011 at 5:38 PM

Haha, phew. Glad we cleared that one up!

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Neil Wilson August 23, 2011 at 3:22 PM

It’s a wonderful article, (and a great cartoon), but it only tells you that you’ve swallowed the propaganda. It’s that word ‘debt’.

The US government ‘debt’ isn’t debt as you understand it (a millstone around your neck pulling you under). It’s a government liability – in the same way as a $20 bill is a government liability.

In accounting terms on the US dollar balance sheet it just the double entry to private sector financial assets.

Unfortunately if you reduce the government liabilities then you also reduce the non-government financial assets by exactly the same amount. It’s a balance sheet contraction at the US dollar level.

The US is sovereign in its currency. The various types of liability it creates are what helps oil the works of US commerce (and the world by its status as reserve currency). An expanding economy requires an expanding US government liability in the form of dollars.

Yes it’s counter-intuitive but that is what the national accounting demands.

The clever politicians and their money masters are using this trick of equating public debt with private debt as a way of slashing services and putting up the taxes of workers.

After all the easiest way to get rid of the ‘debt’ would be to confiscate a load of private financial assets from those who have more than they need (ie tax them). Yet when you suggest that there are squeals from the targets. Much better to let the payroll tax cut expire…

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Baker August 23, 2011 at 5:41 PM

Thanks for the long response, Neil.

I don’t agree with you the the national debt doesn’t weigh down or drag down the potential of the country.

I also don’t agree with the notion that creating more dollars to pay more debt payments is required for a sustainable government operation. I do believe it’s the best way to push the problem down the road. And I do agree with your notion that it’s far less painful in the short-term.

Good debate. :)

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Chris August 23, 2011 at 4:21 PM

Social Security is self-funded, and can continue to be self-funded if changes are made to the contribution and payout algorithms. So “cutting” there won’t do you a lick of good, unless one plans to literally steal money from an insurance plan.

So other than Medicare, Medicaid, and Defense, where are the cuts really going to come from? In the 2010 Federal Budget, total spending was $3.55 trillion. Social Security makes up $695 billion, so that leaves us with $2.855 trillion of non-self-funded spending. $164 billion was spent on interest, which was thought (until recently) to be an untouchable necessity. That brings us down to $2.691 trillion.

$743 billion is in Medicare and Medicaid, which can clearly be reduced – there are plenty of other countries in the world that provide healthcare to the elderly, poor, and needy at substantially lower cost. But then you have to choose between socialism and letting people get sick and die. Best of luck maneuvering that pitch.

$663.7 billion was spent on Defense. Good luck.

So excluding those two monsters, we have a paltry $1.25 trillion national budget for all other federal operations ($4,100 per American per year). There’s a half-billion (total) in projects like welfare, unemployment insurance, and the like, but increasing rates of starvation and homelessness seems a bit cruel. There’s another $750 billion spread across the other federal functions, of course:

$75 billion heads to Health and Human Services to cover things like the CDC, FDA, and NIH, but given that there hasn’t been a serious pandemic since this department was created, I’d say it seems to be money well-spent.

$72 billion goes to transportation (and that hardly seems enough – have you seen our roads and train lines?), $52 billion to Veterans Affairs (ha! good luck cutting that!), and $50 billion to diplomacy via the State Department (at least it’s cheaper than wars). HUD, Homeland Security, and Education get between $40 and $50 billion apiece, but leaving our borders open and our people ignorant and homeless seems like a rather steep price to pay.

The rest of the departments have such paltry budgets that cuts there hardly seem worth the discussion.

In the end, I’m not writing this all to defend government spending. I’m writing it to say that a blanket statement like, “Cut spending!” is so much easier to say when you don’t have to dig into the numbers and figure out how many jobs the government is going to kill just to keep Warren Buffet’s 15% tax rate.

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Baker August 23, 2011 at 5:47 PM

Thanks Chris!

We can definitely cut spending (and better spend the money we do have) in Social Security. I also believe that we can cut into all of the huge sources of spending (and that we will need to).

I don’t believe we can tax our way out of the problem, so spending cuts have to be on the table. I also believe we’ve plenty of room to cut – but not without all of us feeling the pinch in one way or another. :)

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Jeff Rose August 23, 2011 at 5:06 PM

Wow, those are some scary numbers and an even scarier analogy using the family.

As a financial planner, it’s hard to stay positive and upbeat in helping people plan for their retirement knowing what the government is doing.

As consumers, we (ought to) know what gets us in trouble financially. Why is it that our government and lawmakers don’t get it?

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ferridder August 23, 2011 at 5:32 PM

If the US private sector follows your advice to save more and spend less, then the government deficit will keep rising, as well as unemployment. Cf. the paradox of thrift, and financial sector balances.

Moreover, your worry that “they can find people that’ll keep lending them money!” is completely misplaced. The US government creates money (from thin air) by deficit spending, and the holders of that money are falling over themselves to buy treasury bonds that yield a guaranteed interest. Look at what is happening to govt interest rates as the debt rises.

A country is not a company (cf. Krugman), nor is it a family!

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Baker August 23, 2011 at 6:02 PM

I feel that while it would hurt in the short-term, it would be better in the long-term.

Did you have a solution that you wanted to help add to the discussion? Based on your theory we should lower taxes and increase government spending.

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Ferridder August 24, 2011 at 2:26 AM

In the short run, yes. If individuals are not creating enough demand, then the government has to. Tax breaks to low earners, support payments to the states, and increased unemployment benefits (including duration) should do it, until the economy is in stable growth and unemployment (U6) is below say 6%. Some large infrastructure project could also help, especially to soak up unemployed construction workers.

Getting rid of the household debt overhang is tricky, higher inflation or a debt jubilee are the only things I have seen that could acheive this, and both have their problems.

Once the economy is running well, I think something like the plan you suggest would be helpful – tax increases and an end to corporate welfare, especially to the pharma and health insurance industry, and the parasites on Wall Street. Not that any congressman who wants to be relected in the current lobbying climate could ever vote for this.

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Matt August 28, 2011 at 1:28 PM

“Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” -Paul Krugman (2002)

I totally understand that the government is not a family, but I agree with Baker’s bringing light to the issue. Our nation’s current philosophy of economic governance seems to not want to deal with the painful nature of de-leveraging. In a ploy to get people to spend more and save less, government has sought to keep interest rates low and, by their own admission, encourage people to save less and spend more. It’s a great short term fix, but eventually runs out of sources from which to borrow money.

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Todd August 23, 2011 at 5:45 PM

Bottom line, raising your credit limit will not help you get out of debt.

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Baker August 23, 2011 at 5:48 PM

Nicely said, Todd. It buys us time, but time my also buy us inaction.

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David August 23, 2011 at 5:51 PM

Hey Adam, normally I agree with you but I think your analogy breaks down a little when you consider a family with ~$40,000 in income carrying $280,000 in debt if that debt were a mortgage. I’m not saying it’s a good thing to carry that ratio of debt, I’m just saying it’s not out of the ordinary and something that with a tweak here and there a family can overcome over the course of a 30 year mortgage.

And on that line, just like you advocate, that family doesn’t have to simply decrease its spending, it can increase its income by working harder on outside projects just like you! Except, in the governments position that extra work just means higher taxes which, unlike creating an outside business, is darn easy cash (except for the politics of implementing it, of course). Or, barring that, the government can just print more money, something that a family would end up on prison for. (I’m taking no position of if it’s good or bad for the government to do this, just pointing out where the analogy breaks down.)

This is why comparisons of the US government to a family aren’t worth their salt. They are alarmist at best, extremely misguided at worst and based on ideology rather than facts.

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Baker August 23, 2011 at 6:06 PM

Thanks for your comment!

Two notes… Our advice for $40,000 in income and a $280,000 mortgage would be different. I wouldn’t suggest tweaking that and trying to squeeze it out to a family spending far more than they bring in.

Second, the comparison is only to show the number in proportions that are more relatable. In that comparison, I’ve simply divided by 50 million (as others have) which to me appears to be… well, the definition of fact. I’m surprised you consider my thoughts “alarmist” – but I appreciate your side of the discussion!

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Sean August 23, 2011 at 6:01 PM

Thanks Adam for the post. Remember when you were in High School and you wanted to get into to your choice university but you still had a few “safety schools” just in case? That’s kind of how I feel now except it’s looking for a “safety country” instead.

Even that is scary though because I feel it’s impossible for something to happen to the U.S. and not have it felt across the globe.

I guess it’s time to start racking up our food storage right? That will be the hot commodity of the future. Not gold. Not silver. Just good old fashioned food.

OK, gotta go back to work…

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Butterfly Jewel August 23, 2011 at 6:07 PM

@ Paul…lol :-)

I really enjoyed reading your post, as well as watching the video. It gave even more clarity about the debt issue that we’re facing.

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SB @ One Cent At A Time August 23, 2011 at 6:30 PM

Very timely post during your busy schedule. And love that analogy with personal finance. The root of the two issues is also related. Why we spend more than our income? It is because we are inherently populist and care about others.

We spend money on our children, spouses, families and friends because we want to see them happy. Govt. spends money see citizen happy.

Govt. after govt. employed populist agenda to provide us with greater social security and more jobs. While doing these popular works, we forget one thing, that is long term effect of the decision.

We fail to realize that our spending will actually bring discomfort, unhappiness and sacrifices in the longer term. As the person solely responsible for our money, we should exercise control over spending, its for our family’s own good. Govt. also should take a longer time look.

But there lies an important difference between personal finance and country’s finance. We are in charge of our families till we live. But govt. is not, they rule for 4 years,. 8 years or 10 years.

So, who cares about what will happen in 20 years from now. let’s just cut taxes for our voters, this can win us vote! Let’s send our troops over even if there’s no nuke, because countrymen will feel insecure otherwise, we don’t care if costs us 1 trillion dollar, we will borrow the money. Let’s not sanction trade on products subsidized by other countries, because businesses won’t grow otherwise.

The ones above are from a politician’s point of view.

I am not an economist to give solution to this problem, but, to me let’s call our troops back, let increase taxes for rich, cut social security. Develop state of the art software to detect tax frauds, suspend all municipal beautification projects for next 5 years and tax foreign imports to help local manufacturing industry recover etc can be a good start to cut deficit.

Aren’t they similar to cutting our cable bill, downsizing home and cutting all other entertainment expenses?

I posted on similar (not exactly) topic yesterday on my blog, want to have a look?
http://onecentatatime.com/what-if-american-stores-stop-buying-chinese-imports/

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Gabriel Sebastian August 23, 2011 at 7:28 PM

As you have denoted brilliantly you have put the problem in immediate order.

I would add that the pain, as you place it isnt as sever as placed. Our fundamental issue is the subsidies and gloated expenditures that are done to keep them from losing votes.

Bloated jails, favor the wealthy, since they are now privately held.
Mortgage tax insurance deductible.
“The proposal, part of a draft by co-chairmen Alan K. Simpson and Erskine B. Bowles, suggested that the tax code could be streamlined, and income tax rates drastically lowered, by eliminating the $1.1 trillion in annual tax expenditure entitlements — subsidies and breaks given to targeted businesses and individuals. The commission chairmen also offered the option of capping the deduction at $500,000 on mortgages, rather than the current limit of $1 million.

The prospect brought an angry outcry. House Speaker Nancy Pelosi blasted the commission’s suggestions, saying it would force middle-class homeowners to subsidize tax breaks for the wealthy. Officials in the real estate and mortgage industries warned that ending the deduction could cripple an already ailing housing market.

“The mortgage interest deduction is one of the pillars of our national housing policy,” said Michael D. Berman, chairman of the Mortgage Bankers Association. “Limiting its use will have negative repercussions for consumers and home values up and down the housing chain.”

But tax policy experts say that for all its popularity, the value of the deduction in public policy is debatable. It was intended to encourage homeownership, but housing economists point out that countries like Canada and Australia, which do not allow mortgage interest deductions, have home-ownership rates similar to those of the United States.

“What the subsidy is doing is driving up prices by encouraging well-off people to take out bigger loans, to buy bigger houses,” said Roberton Williams, a fellow at the Tax Policy Center. “So I think there’s a question about whether that is something the government should be doing with tax money.” source by (Author DAVID KOCIENIEWSKI 11/12/2010http://www.nytimes.com/2010/11/13/business/economy/13mortgage.html 11/12/2010)

As Mr. Kocieniewski doesn’t explicitly spell out in his article, is the completely ridiculous
pyramid scheme is that we are getting 131 billion dollars in benefits at the cost of of 1.4 trillion dollars. With the other 1.3 going to corporations and business owners. And the 131 billion really only favoring people who make enough to actually claim it.
Can this be filed as a ponzi scheme? I wonder…

Holy cow America. Welcome to this reality. Using your blog’s math and rounding. This would shed 14,000 in ridiculous debt that our budget can do without per month.
This my friend would make it immediately less painful.

Wake-up to the fact that we are being spoon fed and being used for every single hard earned penny we can. Not allowing this facade of a subsidy to continue.
Figure out with your taxes and figure out, if you as a homeowner, are even benefiting from it. If you are not itemizing your deductions, you aren’t getting it. Even if you are, find out how much you are saving by it. It wont be much, ask an accountant.

If you feel outrage, write to your members of congress: Removing this alone would almost save our country. It would allow for every tougher decision to be made in the future be less painful.

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Matt Sauls August 23, 2011 at 8:08 PM

Baker, great post. Love the very respectfully communicated disagreements. It’s a credit to the community you’ve built here, and testament to its diversity. I’m going to try and add my respectful two-cents.

It’s funny to hear people defending irresponsibility. This was the entire crux of Baker’s examples, which I think we should take less literally and use as a stimulation for discussion.

Having been someone that has been very irresponsible with money and had an “awakening” many years ago, it’s amazing to me the “logical” defenses of our irresponsible debt or liabilities (which ever we choose to call them).

I’m with Baker, I’m tired of the status quo and I’m putting both parties on blast! The system is woefully broken.

I personally deal on a daily basis with city governments in my line of work. They are being forced to balance the books. They are making incredibly tough choices, and are learning to change the way they do business. For the first time in my adult life, my town has worked their way to a balanced budget. It came with a lot of pain to many in the short term. Many lost their jobs, but over the last two months they have been paving the hell out of the entire town. First time in the twenty years I have lived here. All on a balanced budget.

You may say, “I’d rather people kept their jobs and drive over potholes.” Fine, those people who made those decisions will be up for election and the voters can vote on their decision making. Meanwhile, they balanced the books and didn’t kick the can down the road.

Why do I bring this up? Only the Federal Government doesn’t have to play by the same rules. Only they can print money, devalue currency and deficit spend for long periods of time without getting serious.

It really is down to a fundamental belief system between the role of government in our lives. Should it take a larger role or smaller. How is that balance going to be juxtaposed against completely open free markets, and the overreaching that can exist in that system. It’s an incredibly interesting time in history.

When you travel the world you see civilizations that have risen and fallen. We are naive to think that our economic system is bulletproof. There is a pretty high percentage guarantee that it will fail at some point. History proves this. The when and how is yet to be determined.

For me and my house, we believe the economy starts with us. That’s right, the way we handle our money and careers are explicitly what determines our outcome. Consequently, we have made massive changes in our lives with this feeling of personal responsibility.

Personally I would do everything I could to not send the Federal Government one more extra dollar beyond what I’m obligated until they show restraint. This debt ceiling deal and this hastily thrown together commission has yet to show any recognition of the seriousness of the situation.

Final example in my rant. :-) Dropped my car off today for repair and found out I need my transmission rebuilt. The mechanic has done work for our family for years, and always been a trusted and honest guy. Found out the bill would be really painful, and almost cried. Not because I don’t have plenty saved in my car repair fund, but just because. When you buy things with cash it just hurts more.

I went down to haggle a little bit on the price with him. Walked in and asked where “Dale” was. His wife said he recently had a stroke, and was not doing well. I asked “how has business been”. She said “really bad”. Wondering how long they could stay open. Needless to say, she needed the full amount more than I needed to save a couple of hundred bucks by grinding them. Because my house is in order, I can do this. Also, I’d MUCH rather pump this extra money into a local biz than give any extra $$ to taxes. I know that this will directly go to making their lives better and will filter into our overall economy quickly.

Remember, Personal Finance is personal. Wherever you are in your life, go on a personal crusade to shore up your finances! Thanks for inspiring the discussion Baker!

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Doug August 23, 2011 at 8:26 PM

I hate the “If the Country were a Family” analogy. Here you divide by 50M (despite the fact that there are 103M or so families), then the analogy is that they earn $43k per year, spend $76k, and owe $280k. But everyone forgets about the household net worth of that analogous family — which is the $55T total household wealth of the United States, or over $1,000,000 for the family. Someone with a million in assets can carry a $280k mortgage. And that’s at 2% interest rates — lower than we mere mortals can get, and less than the typical inflation rate.

Or maybe you should consider the value of the United States as a whole, and not the household wealth of its citizens. Estimates I’ve seen are about a quadrillion dollars — $1000 trillion! Divide that by 50M and you get $20M in value (including 13 acres of government land!). :-)

Your point is still valid: the government should balance its books. But the analogy isn’t a family that’s spending more than it earns — it’s more like a business owner who takes in $750,000 in revenue against $750,000 expenses, but then gives out a $330,000 bonus to the manager and takes a loss for the year. The gift to the top guy was the mistake. Maybe they could cut the spending by $50k or $100k, but don’t give the manager a huge bonus next year.

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William August 23, 2011 at 9:03 PM

Great post and really puts the national debt into perspective. However, the 2:1 (cut spending:increasing tax) would never fly. Especially with the younger generation who did not gain from the government spending but are now left with this burden.

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Deborah August 23, 2011 at 11:03 PM

Thank you. Great! A couple of thoughts: Increase taxes on whom? Penalize those who take risk and are successful? Redistribute that earned income to those who did not earn it? Over time, how can that possibly work? The top 10% of earners pays 70% of the federal income tax. The bottom 50% pays just 3%. How about EVERYONE pays SOMETHING? (I like a flat 12%.) Paying NO income taxes removes personal responsibility. Having some stake in the whole tends to make folks pay attention. Is this “mean”? All four of my children (and I) WORK and PAY TAXES. I think it’s MEAN that we have to pay more than our fair share b/c so many people pay ZIP! Second, “tax the rich” has a logic problem. Wealth (the rich) and income are very different. The wealthy tend not to have a lot of income. So in an income tax discussion, increasing taxes on the highest earners means taxing a large group of middle income folks. (If we’re talking about total taxes, the rich pay all kinds of tax. But not income tax.) And if ALL of the income of the highest earners (above $250,000, I think) were confiscated, the total would not fix the problem. Can we agree to stop repeating the “tax the rich” mantra? Third, I can be personally responsible out the wazoo but my earnings are still taken to pay government agencies, employees, pensions, regulations, all increasing at not-very-well-known rates. What serves as the check on this increasing bureaucracy? We the people, I guess. Is it working? It doesn’t seem to be. That’s why taxes cannot increase. Once we’ve turned our earnings over to the government, we have no say in where it goes. If you think it’ll go to pay down the debt or reduce deficit spending, think again.

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Patrick August 24, 2011 at 4:38 AM

Great post Baker, really glad to see a new MvD post, I hope you and your family are well.

Can anyone here tell me why ‘socialism’ is such a dirty word in America, it seems to be used a lot in reference to health care…

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Cortney September 10, 2011 at 11:50 PM

Because most Americans don’t even understand what they mean by “socialism”- it’s a scare tactic kind of knee jerk reaction to anything that they don’t agree with. Basically, “if it ain’t capitalism, it ain’t right” rules the day, and there is a lot of ignorance about what, exactly, Socialism is and does. Funny that many of our allies have “evil socialism” built into their systems, yet somehow they haven’t gone up in flames and dragged us down with them. Instead of being able to rationally look at socialism as a different system, with pros and cons similar to any other system, it’s tagged as something that Obama is infecting us with that will eventually bring down our entire country. And, of course, it conveniently ignored the fact that most successful countries are a mixed economy of socialism-capitalism (see: pretty much the entire Western world). Even the U.S. has a lot of socialistic elements- public school! public libraries! the police force! fire fighters! Egads, we’re going down!- but that is conveniently ignored.

It’s a handy political lightning rod. It’s been especially handy with Obama recently, but in general if you want to sink an idea like the Titanic, just call it “socialism” in America, and most people will run in the opposite direction, with little understanding as to why they’re running at all.

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Tracey August 24, 2011 at 5:32 AM

Wow Baker – looks like the smart people follow your blog! Great to see a new post from you and some really great debate from your followers.

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Danny August 24, 2011 at 12:13 PM

This is a tool the New York Times put together back in November 2010. It lets you try to balance the budget given specific decisions. It may be a bit outdated by now, but still a good exercise to understand what lawmakers are up against.

http://dft.ba/-58L

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dll argh August 24, 2011 at 1:08 PM

The premise is factually incorrect. The government does not need to slash spending immediately. Yes, absolutely, we should be generating surpluses to pay down debt in 5-10 years. But cutting spending now when the economy is slumping is a terrible mistake that will reduce *everyones* income (personal and government) in the short and long term, and will only make the problem worse. This is supported by a long list of economic data and theory. For example, interest rates on government debt continue to go down – despite the debt ceiling debacle, despite the S&P downgrade. Why? Because businesses and investors have no where better or safer to put their money because the economic prospects are so bad.

Borrow now at low rates, repair infrastructure, help household mortgage debt – boost the economy. When the economy does come roaring back, don’t listen to *Republicans* who will howl about tax cuts, instead use the surplus to pay down the debt.

Remember the Bush tax cuts wiped out the surplus last decade. Don’t repeat that mistake.

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Cecile August 24, 2011 at 2:41 PM

Great post, thank you. And great website in general, I really enjoy reading it, probably because we are close in age and it’s easy to relate to what you say.

In this case, I don’t think that the “cutting expenses and raising income” is the only approach that would work.

One of the big problem, in my opinion, in the US (and in France) is that budgeting is made on growth predictions that are always far too optimistic. The problem is that in both our countries growth is now made mostly by consumption (we buy goods) and not by production. I think that this is not sustainable, since one can only consume so much. Plus, if you increase taxes or reduce spending, people will have less money to spend, the will consume less, and we will enter a recession.
The right approach would be to increase the production share of the growth of our countries, ie : bringing the jobs back home. How do you do that ? Well just put a huge tax on imported products, justify it by calling it “tax on human slavery”, “tax on children exploitation”, “tax on environmental destruction” (yes because for those who don’t know it, this is how you can pay people pennies on the other side of the planet : slavery). Once there is this big tax, it’s no longer worth for us to buy products produced overseas and we’ll bring the jobs back.

Since no government is going to do this, your other option is boycotting big corporations. Seriously, how can anyone still wear shoes that you know have been made by kids ? I-pods that have been made by illiterate women in “working camps” ?
Start buying local products, they cost more, maybe, but you are supporting a real person. If most of us start changing the way we consume, corporations will have to change the way they produce. Of course, this means bye bye I-pod, but like you guys say “no pain, no gain”.

Figure out what matters for you, make the changes in your life to support a responsible and sustainable economy, and then pass it along to other people, so they might imitate you.

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Neem Ontslag! August 25, 2011 at 5:34 AM

Great article Adam, thank you!

I agree with you, this does not just apply to the US, but to many, if not all other countries in the world. It is of utmost importance for individuals and families to cut down their own costs and be flexible. Only then one will be able to cope with more dire economic environments.

In light of the current global financial turbulence, I believe everyone should be having a Plan B (and perhaps C as well).

Thanks
Bertil

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Creola August 25, 2011 at 7:01 AM

I think this is one of the most succinct posts you have written in a long, long while!

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Jeffeb3 August 25, 2011 at 11:16 AM

Ironically, getting your own personal house in order is probably hurting the government’s bottom line because that entails spending less, and spending on cheaper stuff (from China).

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Wendy August 26, 2011 at 12:32 AM

I have been following this blog for a while, and I appreciate all the helpful information about getting personal finances in order. But this post concerns me. I am glad to see that several others have pointed out that the analogy is not logical. The U.S. Government is not a family. A family’s budget, income, and expenditures do not drive or restrain the country’s economy, whereas the nation’s fiscal expenditures do. It’s a fallacy to suggest that the nation’s fiscal problems can be solved with the same tactics you would use in personal finances. I agree there are problems that need to be solved, but simplifying the problem this way will not bring about a solution.

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Annabel Candy, Get In the Hot Spot August 26, 2011 at 5:08 AM

Hi Baker, thanks for highlighting this. It is scary. We discuss it a lot in our house. Unfortunately what the governments in UK and Australia seem to be doing right now is punishing those who have saved by lowering interest rates and rewarding debtors by helping them out. A Band aid solution. As you say, we are in deep doo doo if they don’t fix things and come up with longterm solutions soon.

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Self Taught Economist August 26, 2011 at 11:12 AM

I’ve never posted, but I enjoyed this article. I’ve been thinking about the “consequences” of the Debt Ceiling Debacle myself. It makes me wonder how the dominoes would fall (i.e. stock market, banks, credit, jobs, etc.) I put together a brainstorm list at http://www.SelfTaughtEconomist.com but I want to know what others think.

By the way, I’m not hoping for a crash or economic disaster. I just want to make sure I’ve thought about possibilities as well as a plan to protect myself and my family.

Keep up the great work, Adam.

~Nick, the Self-Taught Economist

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Welcome Finance August 27, 2011 at 10:15 AM

I’m sad, but we need a radical change. Sorry.

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sophie August 30, 2011 at 4:17 PM

I am upset with how the government is handling our budget. They don’t handle our budget, they handle their budget. Myself and the majority of the public would not have approved all of the government spending that got us into this sh*thole in the first place.

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Mark Klanac September 10, 2011 at 7:44 PM

The analogy of an American family being the US Gov’t is perfect. It really puts into perspective what a mess our country is in and how no one seems to be using common sense.

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Randy November 3, 2011 at 5:33 PM

Great post!

I find it strange that the media still leads the news with 9% unemployment, when are we going to start talking about that being the new norm? While the government has been doing a lousy job at managing our money, most americans have been doing the same with their own budgets.

I feel this crisis has rightened a lot of belts, and I would not doubt if people in general start saving more, spending less, and most importantly stop taking out massive amounts of debt for day to day items. Basic math would tell you if people accross the board are spending less, that would mean less jobs.

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