The Nation As a Family – A Debt Story
While all analogies have their limitations, many have looked at our crushing national financial situation and said, what if individuals lived like this? Don’t families cut back when income goes down, rather than actually increasing their debt load?
Of course, we can see where the analogy breaks down: most heads of families don’t take money from some of the members, give it to other members, all in the hopes of being elected head of the family next season. But let’s look at some real numbers as if the country were a family in order to put some of these crazy numbers in perspective (aside: if the numbers keep increasing like they have, our kids will be using scientific notation to describe federal budgets).
The US median income is $52,029*. Let’s use $50k even for a nice round number. The US national debt is $14.14 Trillion. The US GDP is $14.26 Trillion. I’m tempted to call the GDP the national analogue to household income (HI), but the “national debt” is the debt held by the government; the GDP is the income of the private sector–the country as a whole. Thus, tax revenue is, IMHO, the correct counterpart to HI. Fiscal year 2010 receipts were $2.162 Trillion (CBO, via Wikipedia). Using GDP as HI would be a much more rosy picture, that is, if we think of the family making $50k/year as having only $50k in debt.
No, the situation is much worse. That family is actually $327k in debt, despite only taking in $50k/year. Now, some of that might be the mortgage. That could easily be $200k of secured debt, leaving $127k in other debt (credit cards, student loans, medical payments). Let’s say that the interest rate on their debt is 10%. In order to keep their debt from increasing, they need to pay a little over $1000/month out of their gross income of $4167/month. That doesn’t include the mortgage (for $200,000 @ 30 yr. fixed @ 6%, payment would be $1200/month). Over half of their monthly income is spent on the mortgage (principal + interest) and other debt (interest only in this example).
The problem for this family is that the grocery budget in coming years is going to balloon due to growing kids who eat much more, and the savings that were supposed to be for replacing the air conditioner/water heater/roof were actually spent on vacations, and they gave themselves some IOUs for that money. Since the fam isn’t even able to live within their means now–their debt is increasing every month–their interest payments are increasing as well, making their principal balance that much more grim. But they’re not worried; the heads of the household are still in control, and the kids are happy thanks to the abundant food, the game consoles, the new 50″ widescreen and the Blu Ray player. Mom and Dad aren’t in danger of getting voted out of office.
That works, of course, until there’s no office left.
*Median Household Income for States: 2007 and 2008. American Community Surveys. http://www.census.gov/prod/2009pubs/acsbr08-2.pdf, accessed 02/21/2011.