One of the problems just about everybody has in trying to follow the endless debate about the importance of large federal budget deficits is the sheer size of all the numbers. Hundreds of billions of dollars don't mean much to those of us used to dealing with nothing bigger than thousands in our daily lives.
Well, suppose the federal government were not a gigantic entity spending an amount close to one-fourth of the U.S. gross national product. Suppose it were a family with, say, $30,000 in after-tax income in 1984. . . .
Of course, an ordinary family doesn't devote more than one-quarter of its budget to buying weapons and hiring security guards to protect its home. Nor does it usually have the option of increasing its income by requiring someone else to give it money, as the government can do by raising taxes.
But in other ways, the government and our hypothetical family pay bills for many of the same things: food, housing, medical care, education, help for elderly relatives and charitable gifts.
So set aside the obvious differences for a moment and think about what the federal budget would look like if it were on a family budget scale. Suppose the government's $670 billion in 1984 revenue had been $30,000. . . .
On that same basis, our family has got a problem because it spent $37,836. That may not add up to misery, as Charles Dickens once wrote of unbalanced family budgets, but it is a source of considerable concern. The problem is hardly new: The same thing has been happening for years, and the family can't figure out what to do about it.
But the problem is not nearly as serious as it might be, because our family has quite a few assets and there are plenty of lenders eager to loan it money. Still, the family's debt is growing pretty fast, as it will whenever you are spending 20 percent more than your income year after year after year.
Right now, the family owes only $58,343. But two years ago, it had only $41,597 in debt and its interest bill was just $3,806. In 1984, the interest bill jumped to $4,898, and it will go up another $931 in 1985. That means that two years ago, the family was spending 13.8 percent of its income paying interest. In 1985, more than 17 percent of a significantly larger income will be used that way.
The family has sat down many times to try to figure out where it can cut back. Everybody is worried about the mounting debt even though the family's income is going up pretty fast, too, and all those lenders are quite happy to keep increasing their loans.
At one family conference in 1981, some less important purchases were stopped, and fairly substantial reductions were made in charitable gifts. The family regretted making fewer gifts, but it had been making a great many and so thought some cutbacks were in order. At the same time, a lot of expenses just can't be cut, and no one wants to cut some of those that can be, such as how much the elderly relatives are getting.
A few years ago, it looked like the family eventually would dig its way out. The bills kept mounting each year, but it looked as if the family income would go up even faster. At the frequent discussions about finances, family members usually could project that, within three or fours years, their income would catch up with their spending -- unless something unexpected happened.
Unfortunately, the unexpected did keep happening. Back in 1981 and 1982, the economy turned sour and the paychecks were smaller than everyone had been counting on. Now there is more work again, and income is growing handsomely. But during the recession, a big gap opened up between income and expenses, which hardly went down at all. So while income is rising steadily, so is the size of the bills, and no matter how sharp the pencil is, the family can't figure out how to close the gap that has opened. One reason is the rapidly mounting cost of all that borrowed money.
Several of the financial advisers to whom the family has turned from time to time have urged the members to do something to increase their income. Some others, however, keep telling them that the problem eventually will go away because their present employers will give bigger and bigger pay raises in the future, and that the gap between income and spending will be closed. The family isn't sure whose advice to follow.
Someone in the family could go out and get another job, or they could try to work longer hours on jobs they already have. But no one is really very anxious to do that. All those extra hours of work might make them less able to do really well at their current jobs, and hurt their prospects for pay raises in the future. And besides, none of them would like to give up part of their leisure hours. They've got lots of other things they like to do on their own time.
Meanwhile, they all know they have lots and lots of assets to use as collateral for the loans they have to take out. The lenders like the assets, but they are also confident that, if the family ever really gets squeezed, it could boost its income. All it has to do is to decide to do it.
So everything just keeps rocking along. But a squeeze likely will come sooner or later. The way to know that is to look at how much the family is borrowing and how much it is having to pay in interest.
Each year, the family's income is falling short of what it is spending by an amount greater than its annual interest bill. That means that, even if the family had no debt at all, it still would be in the hole and having to borrow money, thereby creating a debt. So long as spending for things other than interest is greater than the family's income, it will keep getting deeper and deeper into the hole.
In 1985, the family will be borrowing $7,702 and paying $5,829 in interest. The $2,127 difference in these two figures is the real measure of the family financial distress. So long as new borrowing is greater than the interest bill, the cost of the family's debt will be going up faster than its income -- and that way its personal budget gap never will be closed.
Closing the gap will become more difficult as each year passes and the interest bill grows. More and more cuts in other spending will be required to bend the slope of that line downward so that, sooner or later, it will intersect the family's income line.