PBS NewsHour business and economics correspondent Paul Solman answers questions from Next Avenue visitors about personal finances, business and the economy. His advice appears on Next Avenue as well as Solman's PBS NewsHour blog, Making Sen$e With Paul Solman, and the Rundown, NewsHour's blog of news and insight. PBS NewsHour is an hourlong television program and accompanying website with the mission of providing intelligent, balanced and in-depth reporting and analysis of the day's most important domestic and international issues and news. Below is a question Solman received from a NewsHour fan, and his answer.
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Heena: Hi Paul, I love your explanations of various subjects. Here's a question for you:
Despite all the talk about deficit reductions of up to $4 trillion, it seems we won't be making any dent at all in the national debt.
How will we reach a balanced budget? Here's how the numbers look, if one were to delete eight zeroes and pretend this is the family budget:
- Annual family income: $21,700
- Money the family spent: $38,200
- New debt on the credit card: $16,500
- Outstanding balance on the credit card: $142,710
- Total budget cuts so far: $3.85
Can you throw some light on this subject please?
Paul Solman: One of the most difficult things to explain is the fundamental difference between the family budget and a country's budget. If a family borrows more than it can ever pay, it goes bankrupt. By contrast, if a country takes on too much debt, it can always tax its citizens more.
One way to think about it: collateral.
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So imagine, for a moment, that my wife and I keep borrowing more than we earn. (Fortunately, we've been lucky and careful enough never to have been in that position. But just suppose.) What would happen?
Eventually, the interest we pay on our debts would mount. That's because running a deficit entails an ever-greater cumulative debt load, on which we'd have to pay more interest, which would add to our budget shortfall.
"Ah yes," you might say, Heena. "Exactly like the U.S. government."
But no, not exactly at all.
My Real Estate vs. the Government's
This may be an outlandish point, but consider just our respective real estate holdings.
My wife and I own 8,000 square feet, less than one-fifth of an acre. I consider our spread extravagant, having lived in rental apartments from birth to age 35. But compare our lot to the acreage of the United States.
The U.S. owns 650 million acres of public land. Since the total U.S. debt amounts to about $16 trillion, if you include the money we owe to our own trust funds (Medicare, Social Security, etc.), the United States has borrowed about $20,000 worth of debt for every acre it owns. For my wife and I, with our fifth of an acre, that would mean carrying about $4,000 worth of debt. Manageable, wouldn't you say?
Different Ways to Pay Back Debts
Another point. If we need money to pay back our debts, my wife and I can ask our fellow Americans to help, but we can't very well demand money under penalty of law. But Uncle Sam can — and does — by taxing his 309 million nieces and nephews. There's almost no limit to how much he can raise this way.
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The bottom line is this: A country can draw on all sorts of wealth that a family cannot.
It is troubling that we have not, in recent years, used our wealth to pay our bills — having spent far more than we ask our citizens to pay for — and made up the difference by borrowing.
But lenders must think we'll be good for the money. They've certainly been willing to lend at low — in fact, historically unheard of — interest rates.
The Government's Credit Score
If we were a family, however, with the kind of debt numbers you mention in your email, we'd have a credit score so low, our lender of last resort would be the local loan shark: The one who collects from deadbeats with an appeal to one's knees. The United States is not in an analogous position.
As to what's going to happen to the U.S. budget, it beats me. But we'll begin to see soon enough.
Paul Solman is a member of the Twitterati and can be followed at Twitter@paulsolman. His daily blog can be followed, well, daily at Making Sen$e by linking here, or just Googling the words: "Making Sense."