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
