The National Debt: The United States Government is NOT a Household
I keep seeing this around the internet:
This puts the U.S. national debt in perspective:
• U.S. tax revenue: $2,170,000,000,000
• Federal budget: $3,820,000,000,000
• Current deficit: $1,650,000,000,000
• National debt: $14,271,000,000,000
• Budget cuts: $38,500,000,000
Now, let’s remove 8 zeros and pretend it’s a household budget:
• Annual family income: $21,700
• Money the family spent: $38,200
• Additional charges on the credit card: $16,500
• Current credit-card balance: $142,710
• Budget cuts: $385
The trouble is, this doesn’t put the US national debt in perspective at all. In fact, it’s completely uninformed.
Though it is tempting to do so, the economics of the United States Government (or any government) cannot be compared to a private household.
First, a household in this example would owe money to an external credit card company. US debt is actually principally held by domestic entities. As of 2011, 47 percent of the US debt was held by foreign sources, who also happen to be our major trading partners (Japan, China and the UK).
So, according to this analogy, more than $75,000 or this household’s debt would not be to credit card companies, but actually to household members themselves. The remaining $67,000 would be owed to family members (outside the home), local businesses, good friends and neighbors, who depend on the household’s continued support.
This would be akin to a situation where household family members pool money from their own savings to purchase a new family car, and expect that money to be paid back into the pool at some later date at interest. Not many households would do this, making the analogy even more useless.
Second, the interest rates on credit cards are typically between 7 and 36 percent in the United States. The United States Government can currently borrow money for a fraction of a percent, meaning that, with inflation, lenders are paying the US government to hang on to their money. Over time, the US government will pay back less than it originally borrowed. Some people freaking out over the debt don’t seem to notice that the world still seems ready to invest in the US. Despite low returns, lending money to the US is a safe bet. I’m not aware of many households which have credit cards that allow money losing interest rates for very long.
Third, the US government has the luxury of being able to print money. Government debt is held in dollars. If any of you know of a household that has its own legal currency press, let me know.
The US could theoretically, print a boat load of dollars, and pay back the entire debt in a day. Granted, worldwide economic calamity would ensue if done in a day, but it is practically possible in small increments.
Be aware, countries do this. One of the reasons that Spain is hurting so bad in the European economic zone is that, using the Euro, it can no longer devalue its currency (through an injection of newly printed money) to pay down its debt.
I don’t think I have to point out that a household can’t do this.
Fourth, the assets of the US Government are vast. Estimated at approximately $200 trillion dollars, the tangible and intangible assets of the US are nearly 15 times the GDP of the entire country. One of the reasons that people are happy to loan the US money despite low returns is the security of the investment. In a bind, the US can certainly print money (an asset in itself), but can also start selling land, arms, contracts or anything else it possesses.
There’s a reason that the US has an easier time raising money than a cash strapped country like Malawi. Its assets far outstrip its debt. In fact, the national debt, at $11 trillion only a fraction of its total assets.
Face it, if you had $2 million dollars in assets, faced an income shortfall and financial obligations, and somebody came to you and offered to lend you $110,000 at a rate which meant that you would pay back less than what you initially borrowed, you’d be a complete idiot not to take it. Unfortunately, most households don’t have this option.
Finally, the US Government has what most households don’t have: certainty. The US government, though indebted, has the strongest economy on the planet behind it and faces no retirement. We can hem and haw about China, but the truth is that China’s economy is much less certain than that of the US since, lacking a strong domestic economy, it relies too heavily on exports and is insufficiently diversified.
I can’t speak to the relative merits or demerits of the level of debt and debt trajectories, but the truth is that the national debt following the worst economic crisis since the depression should be expected to rise. It still has not reached the levels of debt which followed WWII and we have a much stronger economy now than then.
These ridiculous comparisons of the US economy to a poorly managed household have to go. They are fine for fun political comedy, but too reductive to foster any real discussion.
3 responses to “The National Debt: The United States Government is NOT a Household”
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- - January 2, 2013
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From the Economist:
THE popularity of austerity policies has waned over the past several years thanks to evidence that it may have been counterproductive. But many are still worried by the fact that, relative to national income, government debt is now larger in many countries than at any point since WWII. Moreover, for most nations, government debt is projected to grow relative to income for years to come. This is why policymakers across the rich world have been scrambling to slow the growth of public spending while simultaneously increasing tax revenues. (America’s budget fights should be understood in this context.) Does their urgency make sense? The sovereign bond markets in America, Japan, Britain, and the euro area’s “core” do not seem to think so. These governments can borrow cheaply for decades at a time. While it is certainly possible that the markets are wrong, policymakers should probably pay more attention to investors and less to the fear-mongers, especially since economists do not know how much government debt is too much. In fact, there is good reason to think that many countries with their own currencies could become far more indebted without risking trouble. One reason is that many private investors do not own enough sovereign bonds.
It is important to remember that there is an absence of evidence that governments with their own currencies are too indebted. Those who argue otherwise point to the work of Carmen Reinhart and Kenneth Rogoff, the celebrated authors of This Time is Different. Their paper “Growth in a Time of Debt” claimed that sovereign debt creates a burden on the rest of the economy. (They summarise their points here.) But, as Robert Shiller and Paul Krugman have pointed out, Ms Reinhart and Mr Rogoff never explain how public indebtedness restrains growth. There may be other forces at work, especially since sovereign debt ratios are usually at their highest after wars and financial crises. In countries with their own currencies, private interest rates are now so low that many investors have been grasping for yield wherever they can find it, such as in the revived CLO market. When he evaluated the evidence, my colleague concluded that “debt matters, but the precise way that it matters isn’t as clear-cut as Reinhart-Rogoff seem to indicate”.
Why would private investors want to buy more sovereign debt? A previous post on the shortage of safe financial assets mentioned how pension plans in many countries need to buy more government bonds to avoid mismatches between their assets and liabilities:
Read the rest here.
I just wanted to say that this was a really interesting blog, and I appreciate you for simplifying the issues into laymen’s terms.