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There is a lot of discussion occurring with respect to US government spending, budgets and even a possible shutdown. It can be difficult to grasp the size of millions, billions, and trillions of dollars. Put in household terms though, it becomes understandable. The following discussion covers the period from 1990-2010, and uses actual budget numbers adjusted to household size.
Assume the US government is a upper middle class family. It is spending $125,000 per year in 1990. This covers all the family expenses including food, clothing, entertainment, and housing costs. By 2010, the family spending had increased to $359,000. This is a 187% increase, or almost tripling in spending over 20 years. The spending has increased every year. (See Chart below)
The spending is not a problem by itself as the family may have a very large income (taxes for the government). Our “family” had an income of $103,000 in 1990. Over 20 years, the family was successful and grew income to $216,000. This is a 109% increase, or more than doubling of the family income. The income sometimes fluctuates depending on the economy, similar to a salesman with part of his salary based on a commission.
The problem is the while the family now makes $216,000, it is spending $359,000. The family borrowed $143,000! No family can do that for long without ending up in bankruptcy. By 2010 the family had a total accumulated debt of $1,415,000. Almost $1.5 Million dollars of debt with no savings.
In the spring of 2011 a spending debate occurred in Washington. Republicans proposed cutting spending by $61 billion. Democrats countered this was too drastic and the cut should be $5 billion. A compromise was reached to cut $38 billion. Going back to our analogy, the family is spending $359,000 a year, and cut spending by $3800. The family continues to spend $355,200; even though it makes only $216,000. Does this small cut seem sufficient?
The US government is not a family of course. It cannot go bankrupt, because it can tax, borrow, and create as much money as it wishes. Currently the government is creating money to cover its spending which usually leads to inflation, as was seen in the 1970's.
The chart numbers are taken from usgovernmentspending.com.
Scot Wolf
Financial Independence Planner
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