More Debt Is Not The Way To Stimulate The Economy
Posted on February 29, 2008
Congress recently passed an economic stimulus package that will distribute some $168 billion to US citizens; $600 to individuals, $1,200 to married couples and an additional $300 for each child. Theoretically, we will all rush out and spend this money as soon as we get it to stimulate the economy. Granted, if we did this, it would create manufacturing jobs�somewhere�and may give a boost to the service sector in this country, but at what cost.
We don’t have an extra $168 billion lying around to give away, so where is the government getting the money? It’s borrowing it, of course! $168 billion doesn’t seem like a lot when compared to the total national debt of roughly $9 trillion. Like an addict high on drugs or alcohol, we’re a nation staggering around high on borrowed money. With a standard of living propped up by a $9 trillion national debt and an additional $2.5 trillion in consumer debt, no wonder we appear to be the most prosperous nation on earth. And, this doesn’t even include the nearly $2 trillion in general obligation and revenue bond debt that state and local governments have run up.
Any way you cut it, government debt is nothing other than deferred taxes and fees. The revenue to repay the debt has to come from somewhere and that somewhere is you and me in the form of future taxes and fees. Politicians can talk all they want about tax cuts, but when cutting taxes results in higher deficits that are funded with borrowed money, they aren’t tax cuts, they are tax deferrals. The question everyone should be asking is, “What kind of standard of living would we be enjoying if we suddenly had to pay off the debt?
To help answer this question, let me offer this example of how deficit spending impacts personal finances. Assume your take home pay is $3,000 per month and you have just received a credit card with a $12,000 credit limit. Assume that instead of living a $3,000 per month standard of living, you choose to live a $3,500 per month standard of living and charge the difference of $500 per month on your credit card.
You could keep this up for many months before reaching your credit limit, especially if the bank kept increasing it. To a coworker who also brings home $3,000 per month, but lives a $2,500 per month standard of living and saves the other $500, you would appear to be enjoying a much higher standard of living. However, when you max out your credit limit and can’t get it increased anymore, big changes occur.
The first thing that happens is you are forced to reduce your standard of living to the level your income will support, but how much is that? If you make the minimum required payment of two percent per month on a $12,000 outstanding balance your payment would be $240. That’s $240 that won’t have for current expenditures in addition to the $500 you can no longer charge to the credit card. If your interest rate is 18 percent, about $180 of your payment will go to interest and you’ll only pay off about $60 of the debt. At best, you’ll have to reduce you living expenses from $3,500 to $2,760 per month and continue this for nearly eight years before your debt will be paid off. Can you see what a dramatic affect this would have on your standard of living?
Now, contrast this with your coworker who earned the same amount, but chose to live more frugally and save for the future. In the same amount of time it took you to run up $12,000 in debt, your coworker would be debt free and have over $12,000 in cash reserves. At 6 percent interest, this money would produce $50 per month additional income, but even more importantly, your coworker could comfortably weather an economic downturn that may force you into bankruptcy because he has no debt and a substantial cash reserve.
I use this simple example because it illustrates the danger of the path our country has been on for the last several decades. The mantra has been, borrow and spend and worry about tomorrow when it comes. Politicians know about the problem, but are afraid to fix it, because voting for the belt tightening required to do so would be political suicide. That brings me back to the $168 billion that is about to be handed out to everyone. Remember, it’s borrowed money that will eventually have to be repaid from higher taxes or fees. We are being given the choice of what to do with it. We can spend it, save it or use it to retire other debt.
Here’s a tip! If you have high interest consumer debt, pay it on the debt; if you don’t, put it aside in an account and save it. You’ll need it to pay higher taxes when it comes time to pay off the debt. I realize that government wants you to spend the money to stimulate the economy, but this philosophy of borrow and spend is a short term fix to a long term problem. Anytime your outgo exceeds your income, your upkeep will ultimately be your downfall. Think of it as putting lipstick on a pig!
Like the earlier example, boosting the economy with borrowed money is like giving a fix to a drug addict. It may provide an immediate high, but it leads to an addiction that will eventually destroy our way of life. Unless we start weaning ourselves from the unrealistic prosperity that borrow and spend government has given us, our children and grandchildren will never forgive us for the legacy of debt that will rob them of the prosperous lifestyle we have enjoyed.
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