Monday, August 8, 2011

A Better Budget Analogy

The budget, deficit, and credit problems of the United States are complex, being made up of many interconnected issues. In an attempt to break down the overall series of problems into more easily discussed topics, a lot of political writers have been indulging in analogies. A popular version has been to compare the American budget to a family's budget.

What they come up with goes a little something like this:

Imagine that you earn $50,000 per year, but that you spend $75,000 per year. How do you solve that problem to avoid building up so much debt that you go bankrupt? You cut your spending and live within your means. The government needs to cut spending and be responsible like you would with your personal budget.

That is a bad analogy. It serves to illustrate the conservative point of view very well, namely that the solution is to cut federal programs as much as possible. But as an analogy of the issues facing the United States government it is a failure because it does not account for the actual behavior of our government that lead to the crisis we now face. We have been cutting taxes while simultaneously increasing spending. We have voluntarily reduced the "income" of our theoretical family in the analogy.

Let me see if I can come up with a better analogy:

Imagine that life is treating your family very well. You make more than you spent so you decide to cut back on the hours you work and therefore reduce your income. Meanwhile your family expenses keep going up and you start renting two very expensive vacation homes. In short order, you are not earning enough money to pay for all of that and are borrowing money make up the difference. Your debt is climbing out of control. What should you do to fix it?

Firstly, get back to full time work. Maybe you should even pick up some extra hours at work to earn some extra income, at least until you can get your debt under control. Then cut any extra unnecessary expenses, like those vacation homes, so that you can maintain the family essentials like safe food, health care, clean water, housing, education for your kids, retirement savings, investment in the future, etc. No you might not be able to expand those essentials in this time of crisis, but you can preserve them if you go back to work.

Like my theoretical family, our government needs to earn more which means raising taxes. It means raising taxes a lot to wipe out the deficit and to get debt under control. This should be the very first order of business, just as returning to full time work and putting in extra hours would be in the family analogy. Then cut out the unnecessary, expensive, vacation homes; the ridiculous war mongering in the Middle East that we can not afford to sustain. Then cut other bits from the budget with an eye towards doing the least harm to the citizens of America, especially those who really need help like the children in the family analogy.

No, even my analogy isn't perfect. No analogy ever really is and in this case we are trying to draw comparisons between the budget of the United States to that of a family. Yeah, that is a quite a stretch. But at least my analogy takes into account the voluntary reduction of income that tax cuts represent and that makes it better than the conservative version.

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