Could You Run Your Family Finances The Way The Federal Government Runs The Country?
I’ve always wondered about that. How long would it last before I totally ruined life for myself, my wife, kids, and everyone else in my family? We are taught that we need to be financially responsible, to pay our bills and to not get in over our heads, but does the government play by the same rules?
The stats and charts in this post were taken from https://www.usgovernmentspending.com unless otherwise noted.
The current population of the United States is 323.1 million people. The Gross Federal Debt, listed above, is almost 21 trillion dollars. We’re looking at a debt of $64,393.55 per person. Not just per adult, but per every man, woman, and child in the country. That’s so much that it’s ridiculous.
During my research I learned that the government pretty routinely runs a deficit of about 95% of GDP (Gross Domestic Product). That’s telling me that if, for example, the government takes in 100 billion, then they will borrow another 95 billion, so they only have actually taken in 5 billion. The following chart was found on Wikipedia. Notice the high percentage of debt as a % of GDP in the last few years, on the right side of the chart.
How About An Experiment With A Family Budget?
Let’s see. If my family makes $50,000 per year, then if we treated debt like the federal government does, we could borrow $47,500 to give us $97,500 for the year. Of course, that extra $47,500 isn’t free, it’s a loan, and we will have to start making monthly payments on it. Using 4.5% interest and a 5-year loan, our monthly payment is going to be $885.54.
So, in year 1 of living like the government does, we’ve increased our cash on hand from $50,000 to $97,500 by borrowing. Our payment is $884.54/month.
In year 2, we do the same thing. We earn $50,000, and borrow another $47,500, for $97,500. Since we just borrowed another 95% of our income, we need to recalculate our debt and monthly payment. During that first year, we paid $2,105.83 in interest, and we have a balance of $38,093.77 left on our first loan. With $50,000 income, we have a surplus of about $11,900 between what we make and what we owe.
So, adding the remaining $38,094 (rounding up the pennies) to our new $47,500, we need to finance $85,594. Our new monthly payment is now $1,596. That’s pretty much about the same as a normal house payment. But we’ve got our $94,500 to play around with.
On to year 3. I’m planning to take this example out to 5 years. In year three, since I didn’t get a raise, I still make $50,000. Since I want to be like the government and borrow 95% of my income, it’s the same amount as before. My loan balance has become $68, 644 remaining. I’m starting out $18,644 in the hole. I’ve begun deficit spending, just like the federal government. I refinance with the new $47,500, for a total of $116,644. Wow, my debt is really growing! My payment is $2175/month and I still owe $93,545 at the end of the year.
Year 4 is here, and I want out! This time I finance the $93,545 I still owe to the new $47,500, for a total of $141,045. Since I only make $50,000 per year, my deficit is now $91,045.
My new payment, using the same interest rate and term as before, is now $2,612/month. After paying that for the year, our remaining balance is $112,392.
Wow! Four years of borrowing like the federal government, and my deficit starting year 5 is $72,248. That’s how far in the hole I’m starting the year. One more year to go in this example, which I admit is over simplified, but does show how deficit spending builds debt.
In year 5, I make my $50,000, and borrow my $47,500 again, adding that to the remaining $112,392 left on the loan. So, I’m refinancing 159,892. My refinanced loan is now costing me $2,976 per month, and after paying that all the year, my remaining balance is $128,030.
If I come to my senses and stop borrowing at the end of year 5, in 5 years I would have the money borrowed paid off, but I would have paid $20,000 in interest.
That’s a horrible way to live. The government doesn’t stop borrowing. They stay in deficit spending year after year after year.
How Much Does The Government Take In, And Where Does It Go?
As you can see from the pie chart above, for 2018 the government has budgeted 7.23 trillion dollars, broken down as follows:
- Protection 4%
- Transportation 5%
- General Government expenses 3%
- Other spending (I wonder what that is) 8%
- Interest (on that debt) 6%
- Pensions & Social Security 19%
- Health Care 23%
- Education 15%
- Defense 12%
- Welfare 6%
If you add all those percentages up, it comes to 101%. I wonder where the mistake is?
Now That We Know Where The Government Spends Its Money, How Much Does It Take In?
The screenshot above shows that the federal government took in $3.32 trillion dollars in 2017, and spent $3.98 trillion, for a deficit of $665 billion dollars. The deficit is projected to be $833 billion dollars for fiscal year 20118.
As usual, the government is not living within it’s means. According to the federal debt chart above, federal debt has climbed every year since 2007, and probably before that.
So, Is The Economy In Danger Of Failing?
The short answer is no. In fact, according to the website “The Balance,” the debt is good for the economy in the short term. It stimulates growth. In the long term, though, it’s like driving with the emergency brake on. The economy will eventually slow.
We aren’t in crisis yet. Debt crisis is defined as a state where the government can’t pay its obligations. We’re not there yet. Someday we might be, though.
Politically, it’s hard for congress to do anything to control the debt in its current high state. There is no political will to raise taxes, and even less will to cut spending.
Personally, I believe that lowering taxes as the government just did increases revenue to the government. Now that that’s done, we need to find a way to cut spending.
Thanks for reading my post. Please leave a comment if you’d like.