Thursday, April 14, 2011

The federal budget, or: How I learned to stop worrying and love the (coming) bomb

Posted By on Thu, Apr 14, 2011 at 12:07 PM

Philip Greenspun takes his doctorate from MIT and breaks down the federal budget into the easiest sense possible — by dividing everything by 100 million.

I'm not sure if I feel more informed or more terrified.

We have a family that is spending $38,200 per year. The family’s income is $21,700 per year. The family adds $16,500 in credit card debt every year in order to pay its bills. After a long and difficult debate among family members, keeping in mind that it was not going to be possible to borrow $16,500 every year forever, the parents and children agreed that a $380/year premium cable subscription could be terminated. So now the family will have to borrow only $16,120 per year.

To those who'd say that homeowners leverage in similar ways, and that deficit spending is a natural outlet of any government, well ...

It might make sense to borrow free money if one had good investments to make, but the U.S. government hasn’t been investing in infrastructure. The borrowed money is mostly used to pay day-to-day expenses, e.g., higher salaries for government workers. Separately, most infrastructure investments in the U.S. aren’t very lucrative because we already have a lot of infrastructure. It would make more sense for the U.S. government to borrow money and build toll roads in China. But that’s an academic argument because almost none of $1.7 trillion that the federal government borrows every year isn’t used for anything that could conceivably be considered an “investment”. ...

Separately, could an individual afford to borrow 10X his or her income? Interest rates are at a historic low, but let’s say that 5.5 percent is the effective rate that must be paid for a mortgage. The interest portion of the mortgage would therefore be 55 percent of the individual’s income. Property tax and principal payments would add another 4 percent or so, wouldn’t they? Add in homeowner’s insurance, a percentage of the value of the house, maintenance, and utilities, and I think very quickly we find that our individual is paying more than 100 percent of his or her income for housing. I guess that is what Americans tried to do during the Bush Bubble years, but it did not prove to be sustainable.

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