Saturday, January 29, 2011

Do Americans spend their money more wisely than the government?

I was watching this Friday's Real Time with Bill Maher, and one of the Republican guests said something along the line of I believe Americans know how to spend their money more wisely than their government does.  This is something you hear a lot from Republicans.  In general, I agree to the degree that I'd rather spend the majority of my money myself rather than give it to the government to spend on whatever.  However, that doesn't mean that Americans necessarily spend their money more wisely.  For one, some things the government spends money on would be impractical and economically unsound for a person to do on an individual basis (e.g. roads and national defense).

Still, considering all the talk about the national debt, I wondered how much debt the average American household was in compared to the government when you compensated for the difference in wages.  In other word's, what's the average American household's debt as a percentage of its income compared to the US government's debt as a percentage of government spending?

The data I found most readily was from 2006, so I'll use that year for my example.  I fully recognize that to get an idea of how this changes over time, you'd want data from several years (if not a few decades) to see how this relationship changes over time with a changing economy.  If/When I find that data, I'll be sure to update this post or create a new entry.  But in the meantime, let's look at the data for 2006:

  • US Government
    • Total Revenues:  $4.76 trillion
    • Debt:  $8.5 trillion
    • Debt/Revenues = 179%
  • US Household (using GROSS income)
    • Income:  $50,000
    • Debt:  $84,000
    • Debt/Income = 168%
  • US Household (assuming 20% tax rate)
    • Net Income:  $40,000
    • Debt:  $84,000
    • Debt/Net Income = 210%

It seems to me like both individuals and the US government suck at balancing their checkbooks.

I'd be interested in going into this at a greater depth at a later date using data from the IRS or US Census and other .gov websites, seeing as I'm not sure how accurate those sources are.  So let me be clear in saying DO NOT USE THIS INFORMATION as is!  I'm certainly no economist, and I wouldn't even use this in a discussion with someone about taxes and the US debt.  This is just me throwing an idea out there along with some very rough, admittedly sloppy data.  I can't vouch for the accuracy of the above figures, nor the legitimacy of their use compared to other measures.  These figures will also have changed radically over time as debt and revenues have changed in recent decades.

My purpose here is NOT to simply disregard the Republican representative's ideas, but rather just to give us a moment to ask how accurate that sentiment might be and how we might measure it.  There's more to "wise" spending than just how much debt you're in -- you might also consider longterm growth, health, education, and charity toward the less fortunate.

In my opinion, America's spending and debt crisis has less to do with taxes and entitlements, but rather is due to a lack of rationality when it comes to finance in general.  We can't have everything we want in life nor from our government.  Democrats can't increase spending and taxes without taking a closer look at how effective their new (and existing) programs are in carrying out their goals.  If you want to double the amount we spend on education, I have no problem with that as long as it works!  Education in the US sucks at multiple levels, and I'd love to improve it!  Republicans, on the other hand, need to stop acting as though tax cuts and minor spending cuts are going to fix the deficit alone.  If we want to reduce the national debt, we need to make our peace with higher tax rates and reduced government spending, even in the programs we like.

Either way, the admittedly rough data shown above should still give you something to think about.  I'll try to add to this again at a later date!

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