Welcome back, class! As I warned you last time this subject would be painful for you, so strap yourselves in. As you’ve probably noticed with all of the charts and graphs we use that economists love to use pictures to make their points. In this case instead of a picture I’m going to use a hypothetical story to get things started…
Let’s say that at some point during your childhood your mother promises you that if you get straight A’s in school and do all of your chores upon graduation from high school your father will buy you a Ferrari. Needless to say, you are very well motivated to be a good kid. You spend the next few years busting your butt, getting all of your chores done and making whatever sacrifices to your social life that are necessary to get straight A’s. Graduation day comes and you walk up to your father and tell him about the promise your mom made and ask when you’re going to get your new car. Your father looks back at you and asks how you thought the family could ever afford a gift like that. Even with both of your parents working full time your family can only afford to live a pretty modest lifestyle. If you had just looked around you would have understood that there is no way the family could have fulfilled such an outrageous promise.
Having your dream crushed would not go over well, and you are justifiably unhappy for having been duped. Now, where is your frustration directed – at your mom or dad? Even though the fault lies with the person who made the ridiculous promise, chances are that most of your anger is at the person who had to point out the reality of the matter and say “no” to you.
To most of us who live outside of the beltway or state capitols the concept of making outrageous financial promises that can never be kept sounds absolutely insane, and sadly for you this is just basic strategy to win an election.
Before we go any further let’s ensure that everybody understands exactly what an unfunded liability is. Break down the two words:
Unfunded – A desired purchase that one does not have the means to buy based on current finances
Liability – Financial commitment to be paid at a later date
What this means is that every time you decree that something will be paid for with funds that have not been budgeted you are creating what is called an unfunded liability (UL). Be careful – don’t confuse unfunded liabilities with capital expenditures. Capital expenditures (CE) can be defined as purchases that are paid over several years and will appear in outyear budgets. Where CE’s are planned and already factored into future budgets, UL’s are not.
To illustrate this think of a household budget. Sister Babe and I have all of our regular expenses that we pay as we consume them – groceries, utilities, gasoline, clothing, etc. We also have items that we had to finance because we are unable to buy them with cash, such as our car or our home. The car and home are not ULs because we have budgeted for their expenses in future years based on our current income level. We know that based on our salaries we can afford the car and our home, so these are not unfunded liabilities. Now, let’s assume that one of us decides to do something stupid like make a large, unplanned purchase that goes enough beyond our budget that has to be financed with the money from elsewhere. In terms of scope, a cup of Starbucks during the day or going to grab a beer with a coworker after work are not expenses we budget, but are small enough that we don’t have to plan for them. If one of us decides to surprise the other with the gift of a Lexus as a Christmas gift, that would have a significant impact on our household finances (If you want to see a great parody of those obnoxious ads click here. Warning – the language is NSFW). We would have to either cut back on other expenses, find a way to make significantly more money, or borrow against our future and make plans to pay for this for years to come, preventing us from using our money for other financial goals.
From your perspective, our consumption would be the equivalent of the day to day services that your level of government provides, such as police and fire services or payments to retirees. Our car or home would be your long term projects, such as building bridges or highways. As for the Lexus, that is everything that you have planned that you don’t have in the budget. Examples of these would be wars, natural disasters, or Obamacare. Sure, if you spend too much you can just raise taxes and rely on unrealistic revenue forecasts from a tax base that your laws incentivise to shrink. Or, if you spend spend recklessly you can just tell people not to worry and that we can just pay for it down the road or punish the wealthy.
Here is the problem with unfunded liabilities – they ultimately have to be paid back, and those payments mean that in the future you will have less to consume or invest. If Sister Babe and I now have a $700 monthly Lexus payment that’s money that we don’t have for vacations, for funding our retirement, paying off the car we already have, or, heaven forbid, forcing Brother Bob to cut his beer consumption.
The same goes for you. The beauty from where you’re sitting is that the pain is spread over many people and your constituents are so used to paying you taxes without question it goes largely unnoticed. But ultimately the debts have to be paid back. I believe it was the writers at Cafe Hayek who defined an unfunded liability as a tax on future generations that will have to be repaid either by raising taxes or inflating the currency. A few years ago I got to hear Ben Stein Speak when he got in front of the crowd and said, “Bueller… Bueller…”. No, he actually didn’t say that but what he did offer was a great definition for our soaring deficits – “Financial grandchild abuse.”
A few years ago Chris Christie was elected governor of New Jersey, surprising many that a conservative Republican could win in such a blue state. The people of New Jersey got fed up with the leadership of one of the best financial minds that Democrats could produce in John Corzine. The state had (and still does) face some serious budget issues, but Christie was the one who was given the task of dealing with the problem. The Democrats in the state legislature naturally proposed taxes on the wealthy to pay for these, which Christie rightly vetoed as soon as the bill reached his desk. New Jersey already suffers from one of the highest tax burdens among the states, and only neighboring New York’s even more oppressive taxes keep more people from North Jersey from fleeing the state. Christie had to make cuts to the budget, and one of the larger outlays that New Jersey has is to its bloated public sector workers. Specifically he targeted the teachers’ union, making the unreasonable demands that they fund part of their pensions and health care – you know, like everyone else has to do. This and other spending cuts made Christie quite unpopular in New Jersey, but at the end of the day who’s fault is the state’s terrible financial condition? Was it the man who caused the problem or the man who enacted the painful solution?
Sadly, in your world these promises get you re-elected until the bill finally comes due. Or when you finally get thrown out of office you can fail upward into some think-tank or high paying lobbying job. And of course, we get stuck with the bill. Going back to Cafe Hayek’s definition, any deficit spending that you commit is nothing more than a tax increase that you haven’t bothered to pass yet. If you want a great example, look at what happened just recently when all of the president’s sycophants in the media were baying over Mitt Romney’s tax returns. The debt ceiling was quietly raised by $1.2 trillion dollars. Using a rough total US population of 308 million people, that averages out to a tax increase of $3,896 for every man, woman and child in America.
And if you think we can get around that tax increase that the president just passed by simply demanding that the wealthy pay their “fair share”, think again. Declaration Entertainment’s Bill Whittle does a great video walking through Iowahawk’s analysis of how much of an impact on the debt we would have by confiscating private wealth. If you have five minutes it’s well worth watching.
To shoot down another argument supporting deficit spending we can look at every lefty’s favorite economist, Paul Krugman. By calculating that most of our federal debt is held by American entities, whether it be private citizens, banks, etc. the debt is meaningless because we“owe it to ourselves”. This is a perfect illustration of why it is dangerous to listen to people with grand ideas and minimal experience in the real world. An old coworker of mine gave me a phrase I love to use, Krugman is “buzzword compliant but experience deficient.” When you’re looking at the world from eight miles high it’s easy to make assumptions about a big picture without realizing that the big picture is made up of an incredible number of small moving parts. Every bit of that debt that “we owe to ourselves” is exactly that – it is owed to some person who is working under the assumption that at some point they will be paid back for the loan they made. Yes, the borrowee can take a loan from someone else to pay it but at some point there is an end where the debt has to be paid.
To show this point of owing to ourselves with a real life example we can look at an example from my past of betting on football with friends. When we were in 6th grade my buddy Richard (not his real name) sat behind me in Sunday CCD class. I would always tear out of the newspaper the latest betting lines and we would pass the paper back and forth negotiating which games we would bet on and at the end of class we would come to an agreement as to which games each would have. We were twelve years old, so our big stakes betting was a quarter or fifty cents per game. Every Tuesday morning when the gaming week ended after the Monday night contest we would settle our debt on the playground with the loser paying what he owed. If I remember correctly I trounced him pretty well that season, having an advantage for the year of being up around $6 after the Super Bowl. Being a good sporting friend I offered double or nothing on the following week’s Pro Bowl all-star game, which Richard won – easy come, easy go.
In contrast, I started a new job just over a year after graduating college. A coworker who I’ll call Charles suggested we bet each other on some of the weekend pro football games. This was probably the first time I was betting on football since my days with Richard, so I gladly accepted. This time was different though – I got out to an early lead in the season, but instead of paying each week Richard suggested we apply whatever he owed toward next week’s games. This kept up until I was going out of town one weekend and asked Richard to pay up. At this point he got indignant and said that he bets for friendship and that he was annoyed that I suggested that he pay. Being that he was a coworker bodily harm would have been inappropriate, so I took that opportunity to realize that I was better off without this goon in my life. So for the $10 or $20 that this cost me I gained the ability to immediately send this fool scurrying away whenever he tried to start a non job related conversation.
The point of these stories is that “we owe it to ourselves” only holds up if it is never expected that the original money be paid back. And that money doesn’t get to to, or from, this amorphous being known as “ourselves”. It’s made up of individuals, and at some point no matter how much our government bullies the banks and other institutions to buy its debt this shell game won’t go on forever because it can’t. Anyone remember the bank runs of the 1930’s from your history books or the last time you saw “It’s a Wonderful Life”? This is what happens when a few clever individuals realize they better move quickly if they want to get the debt that’s owed to them back. Then more and more people will figure it out, and the result is not going to be pretty.
There is actually one other way to pay down our deficits other than ruinous tax increases or hyper-inflation , and that’s by spurring the private sector to grow faster than the government that feeds off of it. No parasites can indefinitely grow faster than its host without killing both, yet leftists seem to be in love with gorging government growth for some improved economy that becomes their bizarro version of “Waiting for Godot.” Dubya partially got this, which was how, despite his “irresponsible tax cuts” government tax receipts hit all time highs. Of course, that doesn’t excuse his decision to start spending like a liberal.
We need to start taking a hard look at how you’ve plundered our economy, and we need to start having those painful conversations right now about how much we’re going to need to sacrifice thanks to your selfishness. Bernie Madoff’s name has become almost synonymous for large scale financial rip-offs, yet the $65 Billion that he cost the people who believed in him is is only how much more you take from us in one month – and that’s only at the federal level. And frighteningly enough, while you no doubt agree with us that Madoff belongs behind bars, you probably have the nerve and gall to think that we should be thanking you.
So spare us the talking points that Obama has “given” us these massive tax cuts. Since coming into office the President and his fellow Democrats have increased our federal debt by $3.5 Trillion to $14.2 Trillion in just three years – that’s a tax increase of $11,363 per citizen.
Naturally, I’m picking on Barry O. since he is the one at the helm right now. Don’t think that I’m letting our last president off the hook today. During his eight years in office Bush presided over deficits that increased to $5 Trillion dollars – using my formula above that’s a tax increase of $16,233 for each of us. So you’re on the right track when you tell us that Bush’s reckless policies hurt our country, but it’s not his tax cuts, it’s his tax increases that hurt us. We all agree that Bernie Madoff’s $65 Billion rip-off was criminal. What is it that makes his actions criminal and yours noble? You’d better be ready to answer that, and soon.
OK, that’s enough for today. I know that I was a lot rougher on you than in previous lessons, but sometimes tough love is necessary. But in the words of the great Michael Muir, “And if I offended you, oh I’m sorry but maybe you needed to be offended…” Mr. Muir had a bit more to say on the subject, but in the name of the new civility those words won’t be reprinted in this post. If you are interested you can hear the rest of his musings by clicking here .
“Who the H*** you callin’ fiscally irresponsible? You wouldn’t know what fiscal responsibility was if Milton Friedman was eating Fruit Loops on your front porch!”
The next lesson is only going to be somewhat better for you, as we explain why the unintended consequences of your actions often cause more harm than good. This next chapter will be a bonus section for journalists – never again will you have to type the word “unexpectedly” when explaining why jobless claims increase under President Obama! Next up:
Chapter 9: Unintended Consequences – Bonus Section for Journalists!
Previous Lessons:
Lesson One: It’s Not Your Money
Lesson Two: Intro to Microeconomics, or Why Prices Matter
Lesson Three: Intro to Macroeconomics. or So that’s Where Government Fits In!
Lesson Four: You Don’t Create Jobs – It’s Time to Get Over FDR!
Lesson Four A: By Definition the Government Can Not Create Wealth
Lesson Five: Businesses are Greedy – That’s Not Necessarily a Bad Thing!
Lesson Six: You are Greedy – That is a Bad Thing!
Lesson Seven: You Don’t Invest; You Spend
Opening up with my soapbox – please don’t feed the trolls! Yes, I’m talking about “Liberalmann” & “Liberal(objectivity)”. Don’t waste your time responding to their drive-by postings that are only intended to get a rise out of us and to waste our time responding to them.
And as always, thanks for posting me, Curt!
Awesomely awesomest!
An excellent article Brother Bob, thank you very much for the read. All to often the only numbers people have any knowledge of are the Debt and Deficit…if they even know them. To me, the amount we as a Nation owe in unfunded liabilities is of much greater concern. I noticed that you didn’t include a figure as to what this Governments unfunded liability is, may I ask why? I have seen numbers that place our total liability between 60 and 140 trillion…
http://www.davemanuel.com/2011/06/07/the-big-owe-unfunded-us-liabilities-sitting-at-616-trillion/
http://investmentwatchblog.com/total-us-unfunded-liabilities-are-estimated-at-144-trillion-roughly-1-2-million-per-taxpayer-was-that-a-pin-dropping/#.TzKHnchfS8o
…and I was wondering which figure you feel most closely reflects our actual UL.
Brother Bob, you wrote:
A couple of things.
Each headline that was printed about Bush’s “irresponsible tax cuts” was accompanied by a few tear-jerking examples of pathetic human beings who would be negatively impacted by such a cutback in benefits if Bush followed through and also stopped the ”spending like a liberal.”
Bush couldn’t stand up to those bogus ploys.
He was supposed to be a ”compassionate conservative,” after all.
So, as you rightly ended that paragraph, Bush did ”spend like a liberal.”
What cold-blooded president is going to be able to shake off the sad eyes and thin arms that will be all over the media IF he actually stops the liberal-levels of spending?
Even if, in his best thinking, he knows cuts, not just slowing the rate of growth, are essential, he will need a huge supportive following to be able to follow through in the face of the propagandists in the leftist media.
The poor used to have a ”safety net.”
Nowadays it is their solid foundation.
It needs, for their own good, to be parred back.
OK the other thing.
From that same paragraph came a cool memory from the Inuit who used to work on our farm when I was young.
He really had a ”thing” bout going to the streams we had and collecting the mosquito larvae floating in the still places, destroying them by the millions.
One day I asked him why he hated mosquitos so much.
He told me that there are places in Alaska/northern Canada where mosquitos thrive in puddles on the ice.They look like thousands of black holes on the ice, each puddle is so full of mosquitoes.
One day he watched as they swarmed a group of caribou.
The last animal in the group was a full-grown, but older one.
That was the one they got.
It was cruel as they suffocated it and sucked its blood.
It took about 20 minutes and seemed torturous.
From then on I helped him with his self-appointed task every year.
Thank you, Brother Bob, for another good read.
There is a stark difference in the way the two main political leanings, conservatives and liberal/progressives, believe the government should tackle this issue. That is, conservatives typically believe in an approach of cutting spending, and liberal/progressives believe that if we only take more from the “rich”, in the pursuit of fairness, that all would be well.
And there are, to some degree, some liberal/progressive leaners who do realize that some amount of cutting of spending is necessary, like our own friend Greg, who comments quite frequently here at FA. The only problem is that they want a “balanced approach” believing that a 1:1 or similarly close ratio can get the country where it needs to be, and typically, even those who believe in such an approach think that tax increases need to be first and foremost in the discussion.
Last year, during the entire debt ceiling discussion and debate here on FA, I had pointed out numbers upon numbers showing why, one, that any amount of tax increases, even straight across the board back to Clintononian rates, would not address the problem except at the edges. The majority of the problem has to do with the spending, and until that is reigned in, no amount of taxing short of disastrous can begin to fix the financial mess the federal government is in.
To hijack your example, of a Lexus purchase, let’s say that you attempted to do engage in a “balanced approach” to address your budgeting problems. In this case, you keep the car, adding that $700 a month to your monthly budget, but start to look at other things in the budget to cut out. Your other half wants the first thing you do, though, to be to look for a second job to increase your monthly income(revenue), and then start looking at the budgeting. Why? Because she doesn’t want to give up her daily Starbuck’s or weekly yoga class or monthly “nite out with the girls”. She does, however, concede that budget cuts are in order, after you get another job, and mentions things like cutting out the monthly termite checks, changing the water filter less often, foregoing the seasonal maintenance on your a/c or furnace for a few years, etc( your home’s “defense budget”, so to speak).
So, you go out and get another job. Of course, the only job you can find that will fit the bill is being a stockboy(or man) at the local Lowe’s(or similar) during the night and weekends. What happens? Firstly, the amount of extra monthly dough you take home barely reaches half of that $700 a month you need. Secondly, the extra time away from your home life begins to take a toll on your relationship with your wife and children, particularly if they are barely doing the required housework, and you feel taken advantage of(rich, you, vs. poor, wife and children).
So, you have the second job. Now what? You still need to come up with $350 or so to balance your budget. Your wife still won’t give up her Starbuck’s, yoga, or nite out with the girls(entitlements), and you look to other areas. Meanwhile, the wife goes and gets a whole new wardrobe, adding several hundred dollars onto your credit card account, and your son/daughter in college just had their tuition raised by several thousand per year.
Now, you’ve suddenly added several hundred more dollars to your monthly budget. Your wife says that the house can do without the roof replacement it needs for another year or two, and that the ventilation ducting doesn’t really need to be cleaned this year(again, think of defense). She still requires her Starbuck’s, yoga, and nite out, but now she has added a tanning membership and taken up making blankets for donation to the local animal shelter.
What do you do? She won’t get a job. Your college kid won’t get a job, or transfer to a cheaper school, because, as they say, they “deserve” the school they go to and feel “entitled” to it without having to pay for it themselves. You cannot possibly pile on a 3rd job, as it would affect not only your home life, but also your work at the other two jobs. You know that by cutting out all that home maintenance(defense) that you could get somewhat closer to balancing the budget, but that your home’s value would suffer greatly because of it.
Your “balanced” approach is not working because the non-producers are continuing to add demands upon your budget, increasing it even as you are cutting out other spending. And they won’t give up what they deem as their “due”. Instead, you, the producer, continue to be taken advantage of. One option, to fix the problem now, is to get rid of the Lexus, however, as it has become a favorite thing of your wife’s, and she now feels it as a right of hers to have, vice driving a Hyundai, if you did get rid of it, your marriage would deteriorate greatly, from her perspective. Another option is to get another credit card and add to it monthly to make up the budget difference, hoping that time will decrease the budget, however, you still have 2 more kids to put through college, and it’s likely that the wife will want a new Lexus in a few years as the old one gets, well, old. Meaning, your budget never really goes down.
What do you do? Completely divorce from your wife and kids? Of course, a judge will place demands upon your time and money too, and you might end up on the hook for even more money, depending on their ruling and which lawyer you hired. Put your foot down and demand serious cuts to the monthly budget, like all the little extras your wife requires and that your college kid either gets his own job or transfers to the local CC? That might just get you into court as well.
In the end, you realize that if you continue as you are, you are doomed, and if you start demanding more from your dependents, you are doomed. Your only saviour, possibly, is winning the lottery, but that is akin to the economy growing by five-fold or more in a year, something that is nigh on impossible. And even then, the actual problems still haven’t been addressed in your family. That is, the spending and spending and spending they do while continuing to demand more and more of your time and resources. Given time, the problems, that never really left, will become apparent again.
@Poppa T: I considered adding info on total UL, but this post was already longer than I like to make the postings for this series. Thanks for chiming in.
@Nan G: Loved the caribou story! Very Skookum-esque! =8^)
@johngalt: Always enjoy your comments, well said. And my apologies if I missed them, but when do we start getting guest posts from you? I think I can speak for most of the FA readers when I say that we’d love to see you start some discussions here.
I second that motion!
@Brother Bob: @Curt:
I appreciate the sentiment guys, I really do. I have wanted to contribute, but just have not yet for various reasons, lack of time being primary amongst them. Maybe I just need to find my niche topic and buckle down, like Brother Bob has done with economics. We’ll see. Thanks again, guys.