Deficit Reduction - Time to Drop the Analogies, Stupid

America's foreign investment in nearly as large as the debt and is is growing faster than the cost of maintain the debt. So enough already with lame analogies about balancing the family budget.

In terms of policy battles, almost none have been as rancorous and heated as the 2011 debate to raise the federal debt ceiling that nearly shut down the federal government.

And while most politicians agree with balanced budgets in principle, the approach taken on each side of the aisle is very different.

Progressives argue for increases in personal tax rates while conservatives demand cuts to services.

To support the latter, GOP representatives often spin the simple tale of a family on a tight budget. If expenses are too high or someone loses a job then of course spending cuts are required.

The art of persuasion

This down-on-your-luck family analogy has played well with voters. It’s concise. It’s easy to understand. And everyone — with the possible exception of the ever-more wealthy members of congress — can quickly relate to the central cost-saving message.

This last point should be obvious to most of you since median wages for the middle class have been dropping for nearly two decades while executive compensation has been sky-rocketing.

A cynic might conclude that the analogy was chosen specifically by political/electoral operatives to reach the ever-expanding working-poor demographic — but I digress.

It’s an insulting comparison

There’s another feature about this analogy that makes it perfect for political persuasion: it assumes that the electorate is either too stupid or too emotionally invested in the political dichotomy that is modern American politics to process even the most basic financial analysis.

Perhaps that sounds harsh, but put yourself in the situation of having, for example, a mortgage you can no longer afford, medical expenses to pay or kids to put through college.

Only a damn fool would conclude that life must dramatically and immediately change to meet these unexpected financial challenges.

I prefer to give the public more credit than these politicians who — by the very nature of American politics — are beholden primarily to the special interest groups that fund the modern electoral process.

One size does NOT fit all

What about relying on savings while looking for new work? Seems like a sensible thing to do.

How about negotiating with your mortgage lender for a better rate? When faced with default, banks can be surprisingly flexible.

Maybe you need to swallow your pride and borrow some money from family and friends, or take a loan against some of your existing assets or go back to school for additional training or retraining.

I hear you can sometimes get paid to be retrained!

The point I am illustrating is that every family in a financial crisis has options. Some families will have more or better options than others, but every family will need a solution that is tailored to their specific situation.

Surely some families will need to cut expenses, file for bankruptcy and/or lose their homes. But proposing immediate and severe spending cuts as a one-size-fits-all solution should come as an insult to any self-respecting taxpayer.

Government is complicated ... by design!

In addition to the idiotic simplicity of the analogy, let’s also remember that the federal government is A LOT MORE F#@?ING COMPLICATED than a personal family budget.

That’s right, I said it!

The whole purpose of creating government is to have a large enough system to do big things like putting a man on the moon, creating integrated networks for moving cars, trains and electricity or building a hydroelectric dam.

And by creating a super-sized ‘family’ of over 300 million people, the US government can respond to a financial crisis with a wide variety of tools of which spending reduction is just one.

A history of debt

And better yet, America has a great history of managing debt. As Nobel Prize winner and Professor of Economics, Paul Krugman, wrote on Sunday about World War II:

“Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today...”

“[Yet] ... the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.”

Unlike that time, American debt is now mostly foreign-owned. However, our overseas investments nearly match our liabilities.

That’s right, our investments nearly match our debts!

What’s more, yields on these assets consistently out-perform the costs we pay to borrow from foreign lenders.

Sounds complicated? Let me make my own family budget analogy to help you understand.

If you own a home or car, you might have a loan with a 6% interest rate. You might also have a mutual fund that pays, on average, 9% annually.

Should you be worried about your 30-year mortgage debt or 5-year car payment and pay off your loan as quickly as possible?

While paying down debt may feel better, investing the same amount of money in your mutual fund will cover the interest on your loan and your savings will still increase by 3%.

In this most simple of comparisons, America is in debt, but it’s on track to have more foreign investment than foreign liabilities.

Thus, only a damn fool would be hysterical about deficit reduction right now, especially when unemployment is so high.

Don’t insult my intelligence

As we all look forward to 2012 and beyond, what does this mean for the simpleton politicians — on the left and the right — who use quaint analogies to pull the wool over the eyes of the electorate?

How about an adult conversation and less rhetoric?

How about real solutions to our pressing problems of low employment and a failing education system.

How about compromise instead of political grid lock. Wouldn’t tax reform be an excellent compromise between spending cuts and increased taxation?

How about NOT spending 30% of your time raising money for the next election cycle!?!

Give us something — anything — but please, Members of Congress, no more analogies that insult our intelligence and expose your own ignorance of global economics.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Bob McBride January 04, 2012 at 05:04 PM
Let's also keep in mind that nothing is static. The conditions of today that make one course of action seem like the right way to go can change in very short order. This is why the "bold actions" that many seem to call for are extremely risky - particularly at a time when we're standing on shaky ground as it is. You don't have to look much further than what's going on in the Gulf right now with Iran and the effect it will have on oil pricing to see how quickly significant changes in major components can occur.
Dave Koven January 04, 2012 at 05:22 PM
Let's get rid of "use it or lose it" budgeting. It only encourages wasteful spending by agencies that fear that if they DON'T spend, they will lose whatever is left over in next year's budget. They often purchase things that are unnecessary. This is expensive and wasteful. Why not allow each govt. agency to put unused budget money into an interest bearing account to be spent at a later date when future needs are intelligently discovered?
Joana Briggs January 04, 2012 at 05:37 PM
limiting terms served to eliminate career "public servants" would mean most would not be up for re-election and therefore free to risk. Free to act in the best interest of country. Free to know they and their families will live with same future as the rest of us. Oh, and life time benefits go too.
Joana Briggs January 04, 2012 at 05:46 PM
I think Saxon is pointing out that having "public servants" that keeping pointing and saying we are working on it and they are not fills the ditch. It does not empty it so it is useable. This has us paying to increase problems rather than decrease cost.
Joana Briggs January 04, 2012 at 05:55 PM
now here is a place to diversify our options. Why keep allowing Iran to hold us hostage regarding oil when we have oil here to drill etc.?
Joana Briggs January 04, 2012 at 05:59 PM
Let me amen that idea. Working for years under government grants we had to spend or risk loosing funds for next year. Not just our thinking it was written in guides. We were responsible and creative but often found ourselves unfunded in areas where crisis struck. A slush/crisis fund would as a reward for wisely limiting expenses would have and still would help.
Keith Schmitz January 04, 2012 at 07:07 PM
Absolutely. Money in politics skews the process and from what we have seen, has done nothing for moving the country forward.
Ima Hippee January 05, 2012 at 12:24 AM
Keith - "Don't know where you get your "facts", but out of the top ten campaign donor groups last year, seven have corporate connections. But that was last year. This year is worse." Not sure where you get your facts - Rachel Maddow? On a national scale - six of the top ten are unions and the top contributor is "ActBlue" an online clearinghouse for all things Democrat. In fact, 12 of the top 20 are Unions. You are right, it could get worse this year.
Bryant Divelbiss January 05, 2012 at 04:11 AM
CA, IL, NJ, etc, problems are excessive pension promises to public unions, that is that root cause of their problems period. WI was not as far down that path and we have stopped that nonsense for now. I do not support eliminating the money anyway since that is a violation of free speech. I just wanted to point out people who want to ban Corporate money that is split between parties, but allow union money that goes 90% to Democrats are just trying to get an advantage for Democrats and increase the power of unions in politics. They do not really care about fixing anything.
Bryant Divelbiss January 05, 2012 at 04:19 AM
Victor you still did not answer Eric's question. Who the actual foreign investors is not important. The private American holding are not asset's of the Federal Government that can be used to cover government obligations and do not help to prevent a coming debt crisis.
Bryant Divelbiss January 05, 2012 at 11:50 PM
The 1990's were good economically and budgeting for three non-repeatable reasons. 1. cheap energy 2. Tech Bubble (I'm not sure the innovation going overseas was as much of the drop off as the coming back to reality about the value of tech firms after Y2K was over and the tech bubble burst) 3. Low military spending due to Reagan winning cold war but before 9-11 forced us to take Islamic terrorist issue seriously. PS High taxes certainly were not the reason for growth in 50's and when Kennedy cut tax rates more revenue was collected showing it was also bad policy post war.
Bryant Divelbiss January 06, 2012 at 12:41 AM
Lyle, the reason politicians use the comparison to home budget is to simplify the issue for many who are not paying attention enough to understand. Obviously the comparison is too simplified just as the arguments in this article are nonsensical and poorly thought out. The debt issue is real, and both parties agree we will be destroyed by it, if we do not change. The reality is not just the current deficit but also the unfunded liabilities need to be dealt with and the longer we wait the painful the cuts will be. S&P cut our triple AAA rating and Fitch is saying they will likely cut the rating in 2013. We have seen how the debt crisis played out in UK, and other European nations. I am not suggesting what has been tried. We have never cut Government spending seriously in my life. We have ignored the entitlement issue in last 20 years, or worse in Obama's case, he created a new one with Obamacare. Your refusal to think rationally and lack of concern for solving this issue makes you the one who is part of the problem instead of the solution. We both know that the smarter Democrats know their position on entitlement reform is wrong and dangerous, but it is the only path to re-election and saving an proven failed agenda.
Lyle Ruble January 06, 2012 at 01:12 AM
@Bryant Divelbiss...Nice try at revisionist history. The only thing I will agree to is that energy was relatively cheap. We started the decade of the 90s in a massive recession. We also were fighting the First Gulf War. The tech bubble didn't only burst because of the close of the Y2K, but because there were too many companies that were under capitalized and leverage to the hilt. Money was being speculated and Tech IPOs were a constant in the market. We were beginning to feel the glut of import products and the influence of cheap pricing along with cheap credit. The Soviet's excursion into Afghanistan was the final straw that brought down there house of cards and the inability to keep up with the US arms program. We started the decade of the 90s a trillion deeper in debt after Reagan. However, as the decade proceeded we were bleeding jobs ot offshore because the lowering of trade barriers. From 2001 on energy prices have become unstable, we have fought two unfunded wars and the Bush Tax Cuts have put us into the hole. Finally the full impact has been felt from the Supply Side fiasco. The situation was completely different after WW II and the tax structure reflected a continuation of a progressive tax system. In 1957 a yearly income of $10,000 was considered upper middle income. Ten years later that same 10 grand needed to be $15,000 to equate to the same lifestyle. From 1967 on, inflation took off and now you need $75,000 to equal the lifestyle of 1957.
Lyle Ruble January 06, 2012 at 01:58 AM
@Bryant Divelbiss...The excessive debt is not a good thing, but you, like Belling, are blowing it out of proportion. It was created by supply economic policies which we are now stuck with changing. It was the failed economic policy of Reagan and beyond that has created the demand on the social safety net. We can't simply cut our way out of this mess. We have to increase revenues and that won't be easy, but it has to be done. Family's like yours haven;t sacrificed at all compared to those people who have lost their jobs, healthcare coverage and their retirement. You're still able to support a household on your salary alone allowing Michele to stay at home, but yet you're bitching and complaining about paying taxes to help support the victims of the failure of supply side policies. I don't disagree that government must cut expenditures. Why do we need 11 aircraft carriers and 5000 Abrams tanks. Do we really need all the new military hardware? My point is that we need to cut but not necessarily from the safety net.
Victor Drover January 06, 2012 at 02:53 AM
The major misconception and entire point of this article to try to change misconceptions on how we think about our debt. The actual amount owed to foreign investors is not increasing in the way that many people envision a gambler continually doubling down. Much of the debt is owed to ourselves. You can see the net foreign debt here: http://krugman.blogs.nytimes.com/2011/12/28/debt-is-mostly-money-we-owe-to-ourselves/ Specifically: "People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources." The sooner we stop using these idiotic analogies to try to understand these massive global issues, the easier it will be for everyone to come up solutions. And if you have to use analogies, make them accurate and not simply political scare tactics.
Victor Drover January 06, 2012 at 03:04 AM
See my comment above about the net foregin debt.
Victor Drover January 06, 2012 at 03:10 AM
I agree. I used to work at public and private research institutes and spending out a grant is encouraged. I don't know why it ever came to pass that a fiscally responsible grant-holder with extra funds at the end of the grant would be punished for not spending all the grant money (thus leading to the use-it-or-lose-it attitudes that followed). That said, all the unused grant money probably wouldn't be enough to make a meaningful dent in in the federal budget. The NIH annual budget is about $30 billion or 0.2% of GDP.
Gary Gunderson January 06, 2012 at 12:13 PM
So executive compensation has been skyrocketing for the last two decades? Are you implying - painting with a rather broad brush - that all executives are money-grabbing skumbags? Illegal actions - be they of an executive or a petty theif - are indefensible. I guess you're ok with this "stupid analogy".
Lyle Ruble January 06, 2012 at 01:01 PM
@Gary Gunderson...I don't quite understand your bringing up executive compensation other than bringing up another analogy that is far more complicated than the simple statement. There is some truth in most analogous statements, but the extent that it's true is a different story. I think what most people object to is compensation based on tradition and position and not on performance. Again it is complicated and simple blanket statements make it easy for sound bites but little else. Does executive compensation need to be reformed; You Bet it does. However, how do you do it without getting the government directly involved? Tax reform would go a long way to changing the situation.
Victor Drover January 06, 2012 at 05:36 PM
Thanks for your comment Gary. I didn't make any analogy regarding executives. Nor did i imply that they were corrupt or breaking the law (although the latter is true when it comes to some of the big players on Wall Street). All I said was that the demographic of "work poor" Americans is on a steep rise, in start contrast to Executives who are heading in the opposite direction. No judgement was written, implied or intended.
Victor Drover January 06, 2012 at 05:46 PM
Lyle, I respectfully disagree with you on "reforming Executive pay", at least in the private sector. If the market can bear Executive wages, so be it. It's not the goverments business in my opinion. However, I wholeheartedly reject the ability of corporations to buy politicians via donations to political campaigns or with promise of a lucrative job, both of which result in a lack of regulations and a massive transfer of wealth from taxpayers/public coffers to corporations. These are (some of) the root causes of massive bonuses in the financial services industry (for example) and if that problem is fixed, pay CEOs can make as much as they want.
Lyle Ruble January 06, 2012 at 06:47 PM
@Victor Drover...I hope you didn't misunderstand me; I wasn't advocating the government getting involved with private sector executive compensation. That is the job of the board of directors and the shareholders. My issue is getting compensated for poor performance or non-performance. I look at European standards for executive compensation and it is a much smaller ratio between executive and line worker. Last I read the ratio in the US is something like 400:1. When I state changes in tax policy to help control some of it, what I am referring to is increasing capital gains rates from the current 15% to 25% to 30%. I feel strongly that tax reform is needed and increase of the marginal rates. One way to accomplish this would be with a national sales tax and VAT on luxury items. It is obvious that we need to sensibly cut expenditures and increase revenues.
Bryant Divelbiss January 07, 2012 at 12:18 AM
@Victor the article you linked is far worse than the simplified analogies you complain about. At least the analogies are used to get people to support what has to be done. The point of these analogies, that the large annual deficits & unfunded liabilities in entitlements are a serious threat to our future, is correct if even if the analogy is too simplified. The article you linked is more disturbing than those analogies because it is downright dishonest by lumping all debt public in private to mask the Federal Government debt issue. The debt number that matters is the publicly held debt which does not include things like money owed to SS. It is that debt and the growth rate of that debt that bond holders will be looking at. That is around 60% of GDP of which around 47% in foreign owned. -http://www.forbes.com/2010/03/11/treasury-securities-national-debt-china-trade-opinions-columnists-bruce-bartlett.html Paul Ryan report on issue - http://www.youtube.com/watch?v=vWYAEjVf2cM
Lyle Ruble January 07, 2012 at 12:56 AM
@Bryant Divelbiss...The information you are citing is misleading. It's time to bite the bullet and recognize that taxes and fees are going to have to go up. We cannot avoid honoring the social needs of so many Americans. It's pretty obvious that you have been listening to Belling again and his rants.
Bryant Divelbiss January 07, 2012 at 01:06 AM
@ Lyle I have not complained about my personal taxes. I opposed increasing taxes to remove responsibility of elected officials to be responsible with spending at the state level. I opposed the SS raid to handout money in an election year which would benefit me. All tax related proposals I made would not benefit me. I actually I am OK with my state income tax and property taxes if growth rate controlled to inflation levels. My federal taxes are probably low because of deductions and credits lately. Regardless we should go through everything the government does and evaluate if they should be doing it, that is just being responsible regardless of tax policy. The debate going on now assumes all of the Bush Tax cuts expire and that Obamacare goes into effect so tax increases are baked in, so logically we should only be looking at cutting spending. The best way to get more revenue is a more robust recovery which I have listed in previous article simple things we could do to accomplish that. If we do not deal with entitlement spending we will eventually be in trouble no matter how much we cut defense or raise taxes.
Lyle Ruble January 07, 2012 at 01:41 AM
@Bryant Divelbiss...Your mistaken if you think we are going to experience the kind of robust rebound that we have had after past recessions. The economy will continue a sluggish rise. Job creation is going to be modest at best and slow. Globalism and the impact on our economics means that we are sliding further towards the global mean. High volume consumer goods will continue to be produced offshore. US manufacturing will continue to give way to further movement to a complete service society. Even after we have recovered we will still have U6 unemployment at about 6.5%. You are going to be seeing something you have never seen before and that is a fight to stay in 1st tier nation status.
Bryant Divelbiss January 07, 2012 at 02:34 AM
It i not belling it is every objective observer knows we have to cut the entitlement programs even the Democrat politicians. But rather than announce a plan that gives warning they want to lie a little longer to win in 2012, it may work but they will make harder on the very people they claim to support when the cuts have to be made without warning. We could raise taxes to keep stealing a little more from each generation but eventually that too will fail and people my kids age will be hurt even worse. We need to dare to be bold and make changes to allow their future to have chance. We could be greedy like you and the Democrats and say no we will be the worst generation and make our children pay the promises we got Washington to make to us. It will end badly for all.
Lyle Ruble January 07, 2012 at 03:12 AM
@Bryant Divelbiss....If we do as you say and cut entitlements how are you going to meet the needs?
Bryant Divelbiss January 07, 2012 at 02:15 PM
@Joana Term limits may have use but I would not be confident it would lead to voting in the best interest of the country. Look at the vote on Obamacare, they were willing to sacrifice members to get the agenda done, against the majority of people, and certainly not in best interest of the country to add massive new entitlement program when we cant pay for the current ones in a world where debt and unfunded liabilities are crashing countries from UK to Greece. They may even be more tied to party and the party will help them transition if they vote the way the party wants. The only way a Democracy works is if the people who vote are informed. This is a difficult task with a lazy and liberal media in addition most people not interested in understanding the truth.
Victor Drover January 14, 2012 at 02:17 PM
An interesting folllow up: http://www.nytimes.com/2012/01/13/opinion/krugman-america-isnt-a-corporation.html


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