It Is Not The Government’s Deficits That Worry Me.

It Is All The Personal Debts Being Racked Up By The Citizens!

By Richard P. Halverson

A cursory review of past national campaigns will reveal that government deficits are an issue in all of them.  The parties tend to switch places over time on who is blaming whom for the deficit.  Their convictions tend to depend on who is in power at the time and what the money is being spent on.  So it comes as little surprise that the federal deficit is an issue again in this campaign.  At this particular point in history it’s not the government’s deficits that worry me, it is all the personal debts being racked up by the citizens!

This article is not political in nature.  It is not intended to offer an opinion on which party is correct in this campaign.  This article is about personal consumer debt.

Government and Personal Debt Are Different

I can’t say I have ever heard anyone say the reason for their reckless spending and personal debt was because of the government’s bad example.  I have heard many times people compare the government to a private individual.  The argument goes that if you and I need to pay our bills and balance our budgets so should the government.  The argument is half right.  That is you and I do need to pay our bills and balance our budgets.  However, within limits, the government does not need to.  There is a simple reason.  You and I have many timelines in our life. These include such things as reaching the end of our productive years and of course the ultimate timeline of dying. The government is organized to continue indefinitely.  Consequently, the government can plan to roll over its debt sometime in the future rather than repay it.  Individuals can’t – at least not forever.

I am sure I am already digging myself into a hole with some readers.  Let me be clear.  I am conservative.  When it comes to governments I wish more of them (any of them) operated with the fiscal responsibility of the Church of Jesus Christ of Latter-day Saints.  However, from a purely economic and financial point of view, when it comes to organizations like governments and corporations it is perfectly prudent even wise in many cases to have some debt.  It is appropriate for the federal government to run deficits to stimulate the economy and to meet the demands of national emergencies.

The Trends in Consumer Debt Are a Lot Worse Than the Government’s

There is another reason why I am less worried about the government than its citizens.  The deficit in the U.S. is at a new record high in actual dollars but as a percentage of Gross National Product it is within historical ranges, as the chart below illustrates.  Gross National Product is one measure of the nation’s ability to repay its debts.

Consumer debt, however, is hitting new records both in actual dollars as well as a percentage of personal disposable income.  In this case personal disposable income is a good measure of consumers’ ability to repay their debts.

Consumers have run up their debts, enslaving increasing percentages of their disposable income to debt repayments.  At the same time they have reduced their savings to almost zero. 

It appears that the government’s long-term trends in borrowing are relatively flat.  The consumers of this nation, however, are borrowing more and saving less all the time.

The easy availability of debt breaks down discipline

I said above that from a purely economic and financial point of view there are times when it is wise for the government to run a deficit and borrow money.  Efforts to stimulate the economy are an example.  There are also times when individual citizens are probably wise to borrow money.  Buying a home is an example. 

The main problem with running deficits either at the government or the individual consumer level is that when it is easy to borrow, financial discipline tends to disappear.  There are always more things that would be nice to spend money on than there are dollars available to pay for them with.  That is true whether it is the government or the individual citizen.  The government, being the government, finds it very easy to borrow. I am certain that has lead to a lot poor fiscal discipline over the years.  “Why say no to my constituents when the money can be easily borrowed?”  Unfortunately, it works this way for individuals as well.  Clever modern financial products like credit cards and equity lines of credit have made it easy for the consumer to borrow.  “Why say no to myself when the money can be easily borrowed?” The easy debt financial breakdown occurs both with the government and consumers.  But the charts above suggest the breakdown is a lot worse with consumers than with the government.

The Government Can just Vote Itself Money

There is another reason why the government deficits are not as worrisome as consumer debts, at least in terms of whether they can be paid off or not.  If the government needs more money to pay its debts, it can simply pass a tax law and take it from the citizens.  The individual citizens, on the other hand, when faced with a revenue crisis, cannot just pass a law and raise their salaries.

If one really wants to imagine the perfect financial storm, imagine a time when the government decides to vote itself more money by raising taxes on the citizens so it can pay down its debt, right at the time the citizens need every last penny just to repay their own debts.  It is fairly easy to imagine. Some would argue that if all the facts were on the table we are there right now. I’m not sure whether the government or the citizens will be to blame.

Future Generations Get Stuck with the Bill

One frequent argument against government debt is that the next generation gets stuck with the bill.  It should be noted that we are already the next generation several times removed from our spendthrift ancestors.  Government borrowing was not invented in the past few weeks.  And, as I have argued, it really hasn’t increased as a percentage of the Gross National Product.  So, we are still paying for parts of the New Deal, the Wars, the Great Society and many other government programs that made sense to our ancestors.  Rolling the obligation into the future is just part of a continuing operation.  Our ancestors have died and left us with the bill and we hardly notice it.

It does not work this way for individuals.  Some day the credit card balance must be paid, the car loan must be satisfied and the LASIK surgery bill comes due.  Dying and leaving it to your loved ones is a terrible thing to inflict on them.  Some feel living through it isn’t much better.  Stress from debt leads to health problems, marriage problems and even spiritual problems.

So vote for who you think is best for the job.  With regards to the Presidency, the next President is very likely to see smaller deficits as a percentage of Gross National Product for awhile.  That is because the economy is improving and should continue to strengthen for some time.  But regardless of who is in the White House I hope that individual citizens will begin to reverse their long-term trends of more spending and less saving.  That would be a real benefit for the next generation.