This is the companion blog to the MyGovSpending.com website.





Thursday, April 1, 2010

HARD THOUGHTS ABOUT HARD DEBT

A million dollars is a lot of government-incurred debt for a family generating $75,000 of income a year(1). Interest on that pallet-load of cash is $50,000 a year at a 5% annual interest rate. After paying taxes and rent, there is not much left for sushi.

Luckily, only about $85,000(2) of that $1,000,000 is already spent. Voters have at least a snowball's chance in Hades of stopping the remaining $915,000 of borrowing that government has penciled-in to the family calendar.

That $85,000 is hard debt. These loans are contractual obligations that have to be paid. Just like a mortgage or car loan. There really are very few options, other than pay it or default. (Default includes inflation - a topic for another time.)

"Debt Held by the Public" is the name given in the official records. MyGovSpending.com adds state and local debt to the federal government's total(3).

That $85,000 is growing fast. A typical Ms or Mr Middle America is still borrowing heavily. Not always voluntarily, but via Uncle Sam and a motley collection of state and local governments.

If the borrowing binge were to stop today, interest on that $85,000 at 5% would run up taxes by $4,250 a year on a typical family.

Unfortunately, there's hardly a cowgirl alive who expects the binge to stop today. In fact, we are adding principal to the debt at the rate of $11,000 per year. The Obama Administration's 10-year forecast does not anticipate any reduction in taxpayer debt burden(5).

Please don't take that as a partisan shot. Obama is indeed accumulating responsibility for the debt. But in my mind, the whole "Washington, Inc." ecosystem of special interests, bureaucrats, and politicians is to blame for hoodwinking its citizens for generations.

And ultimately it's our fault -- the voters' fault -- for trusting Washington...for being snookered so easily.

Fool me once, shame on you.
Fool me twice, shame on me.

For those of us who have voted more than once, the second half of that simple aphorism applies.

How large a burden is this hard debt on our typical hard-working, law-abiding, tax-paying Mr and Ms Middle America? When the binge ends - and it will end - our typical family will be on the hook for another $6,000 to $10,000 in taxes each year, or quite possibly more(6).

What will American families cut from their lives? Retirement savings? College? Vacations? Charity? Housing? Cars? Food? Entertainment? School supplies? Clothing?

The answer is YES -- to all.

For a long, long time.

It's a hard debt to repay and getting harder every day.


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Postnotes:
(1) Refer to post on this blog of 25 Feb 2010 entitled "Average US Family Owes $1 Million in Government Obligations. No Kidding." for details.

(2) To calculate an individual family's Hard Debt we add federal "Debt Held by the Public" (from Congressional Budget Office available at http://www.cbo.gov/ftpdocs/100xx/doc10014/03-20-PresidentBudget.pdf) to state and local debt excluding bonds issued for private purposes (from the Census Bureau, available at http://www.census.gov/govs/estimate/0600ussl_1.html.


CBO uses both historical data and projections is generates. It quotes federal debt held by the public on a fiscal year basis, so MyGovSpending.com adjusts the data to a calendar year basis. Census Bureau data lags, so we project current levels of debt based on growth rates of the prior five years.

We prorate the nation's total 'debt held by the public' to a particular family by applying the same ratio that the family's tax burden is to the nation's total taxes as calculated by MyGovSpending.com using work by Chamberlain Economics LLC.

(3) State and local governments often allow private concerns to borrow under a government banner for favorable tax treatment and lower after-tax interest rates for private borrowers. We exclude that debt.

(4) Federal Reserve publication H15 shows 5-year Treasury interest rates averaged 8.9% from 1975 through 1994. http://www.federalreserve.gov/releases/h15/data/Annual/H15_TCMNOM_Y5.txt

(5) Office of Management and Budget, The President's Budget, 2011, Summary Tables, page 146, Table S1, Budget Totals, the lines titled "Debt Held by the Public" as a % of GDP. Available at http://www.whitehouse.gov/omb/budget/fy2011/assets/tables.pdf.

(6) We make the optimistic assumptions that the debt binge ends in 2013 and that taxpayers pay down the federal debt held by the public from the CBO's projected 72% of GDP to a more prudent 30% of GDP over the next 20 years.  State and local debt held by the public is reduced similiarly.  The low estimate of tax increase of $6,000 annually assumes a 5% annual interest rate on the debt throughout the pay down period, while the high estimate of $10,000 assumes a 9% interest rate.

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