Thinking About Thinking

What If The Federal Government Was An Average Household?

Posted in Economy, Pop Culture by larrycheng on October 31, 2009

I’m not an economist.  So, it’s hard to make sense of the trillions of dollars that are thrown around when it comes to the federal deficit and national debt.  So, I thought I’d just normalize the federal income statement and debt statistics against a typical household since it makes more intuitive sense to me.  Here we go:

Federal Government (2009 Fiscal Year)

  • Income (Receipts): $2,104,613,000,000
  • Expenses (Outlays): $3,521,734,000,000
  • Surplus/(Deficit):  ($1,417,121,000,000)
  • National Debt:  $11,874,664,000,000

Now we take that data and normalize it against a household with $50,000 in income (which is the US median HH income):

  • Income: $50,000
  • Expenses: $83,667
  • Deficit: ($33,667)
  • Debt: $282,110

Now normalized against a household with $100,000 in income:

  • Income: $100,000
  • Expenses: $167,334
  • Deficit: ($67,334)
  • Debt: $564,221

Now normalized against a household with $250,000 in income (top ~2%):

  • Income: $250,000
  • Expenses: $418,335
  • Deficit: ($168,335)
  • Debt: $1,410,552

Looking at it this way, I have a couple of intuitive observations.  The $100k household is spending $14,000 per month.  Let’s just say they have $4,000/month in mortgage/auto interest expense.  That means the husband and wife are each running up $5,000 per month – each – on their credit cards if they charge everything.  That’s an average of $167 charged per day per person on their credit cards.  That’s hefty spending especially if you presume only modest savings which is probably a fair assumption given our near negative historical savings rates.

Prior to doing this analysis, I thought the normalized debt number would be outrageous.  It’s probably ~2x what it should be.  A $100k household through most mortgage calculators can probably afford a $300k-$350k mortgage.  So, $564k in debt for a $100k household is clearly too high, but not by several orders of magnitude which is what I though it would be.  Anyways, food for thought…

13 Responses

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  1. Vince Lau said, on October 31, 2009 at 10:49 am

    Thanks for the analysis. That makes me feel a lot better about my own financial situation.

    • larrycheng said, on November 1, 2009 at 11:17 am

      Vince – me too! Unfortunately, we all have to assume some of obligation of the government’s bad balance sheet, so it’s not as though there’s this bright line between the government and its citizens.

  2. Nat Friedman said, on October 31, 2009 at 12:56 pm

    Wow, Larry, this is a great idea. Thanks for sharing!

    • larrycheng said, on November 1, 2009 at 11:17 am

      Hi Nat – hope you’re doing well. Glad you found it helpful!

  3. Prakhar Goel said, on October 31, 2009 at 1:16 pm

    You have made a common mistake here. You have taken the government at its word when it is accounting for itself. That would be like a shareholder letting a corporation do its own accounting without any auditing agency to check the results.

    The technical error here is how the government accounts for debt. It does so on a cash basis.

    So scenario: the government promises to pay in $50 in 10 years (SS, medicare, etc…). How does this affect the total debt number?

    It doesn’t. What happens is that we wait for ten years then then the government pays out $50 and then the debt rises by another $50 (minus whatever payins there are).

    Of course, it is whacked. Most CEOs would go to prison for this kind of balance sheet manipulation. Corporations are required to account for debt on an accruals basis. I.e., if they take $50 of debt to pay for in 10 years, that shows up on their balance sheet immediately (with allowances for interest rates etc…).

    If one carries out the analysis with an accruals basis for accounting, the debt is significantly higher than your $11 trillion number

    • larrycheng said, on November 1, 2009 at 11:12 am

      Thanks Prakhar – thanks for the insight. Any sites that point to what the real debt obligation would be if you considered all the unfunded liabilities?

  4. Jon Smirl said, on October 31, 2009 at 8:50 pm

    It’s the unfunded Social Security and Medicare that are going to make everything collapse. Add $500K of uninsured medical expense and zero in the retirement account to your $100K scenario and look at it again.

    The $1.4T deficit was totally wasted. Do you realize that it would only have cost $1.1T to suspend everyone’s income tax for a year? Think of the economic boom that would have created.

    • larrycheng said, on November 1, 2009 at 11:15 am

      Jon – the $1.1T number if pretty interesting. I never thought about it that way. If the government had relieved everyone of income tax, you’d hope that consumers would pay down debt (like they did with the stimulus checks) and a lot of that money would end up on bank balance sheets. Instead, the government gave it directly to banks, it’s sitting on their balance sheets and the consumers are still in debt and banks aren’t lending. Hence, a liquidity problem.

      • Jon Smirl said, on November 1, 2009 at 11:55 am

        My solution for the housing crisis was to allow you to double your interest deduction. Pay $1 deduct $2. This would have only applied to pre-existing loans.

        It creates a giant incentive to make your payments. It also steered the help to the most recent, highest interest loans. Those were the ones in trouble. If you let your house go into foreclosure you would have lost the double deduction.

        The cost of a program like that was known exactly to the IRS since they already had the interest deduction data from the previous year. We could have kept it in place for two or three years during the recession and then gradually lowered it back down.

        I think it would have stopped 95% of the foreclosures we experienced at 1/20th the cost of bailing out the banks. The 5% that would have still happened are the people who hopelessly bought way more home than they could afford. I believe we are helping people in that last category by making them lose the house as quickly as possible.

  5. Santosh said, on November 21, 2009 at 9:09 am

    Larry – great analogy.

    The Federal Govt. is definitely a lousy role model to have when it comes to healthy finances.

    We hear so many of the economic pundits bemoaning the fiscal irresponsibility of the average household. Some of that noise may be silenced if they look at the parallels you drew.

    Thanks!

  6. SomatiK said, on March 2, 2010 at 5:46 am

    hi, spring is cooming! good post there, tnx for larrycheng.com

  7. get out of debt free said, on March 19, 2010 at 12:33 pm

    Absolutely fascinating thoughts, I wished I could have believed of that. thanks

  8. bad debt consolidation said, on March 27, 2010 at 5:06 pm

    Great stuff, my brother showed me this page. Do you post anywhere else?


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