Economic Stimulus or Bureaucratic Boondoggle
Posted on May 30, 2008
Imagine a scenario in which you have $500 of discretionary funds each month after paying for essentials. You have several credit cards, but owe nothing on them. Your credit is excellent and other than your rent or house payment, you are debt free. You have great credit and are in excellent financial condition, but all your friends seem to have so much more than you do. They take exotic vacations, buy expensive clothes, eat out in fine restaurants and in general seem to enjoy a much better lifestyle than you. You know they don’t earn any more than you, so you wonder how they do it.
Then one day while discussing finances, you learn that unlike you who enjoys only the benefits your $500 per month in discretionary will buy, your friends do whatever they want and charge it to their credit cards. They explain that when they put things on their credit cards, they only have to make minimum payments that amount to about two percent of the outstanding balance. With $500 of discretionary funds, that’s enough to make the payments on $25,000.
Wow, you think! No wonder they seem to have so much more than I do. Maybe I should be like them and not worry about it. After all, as the years pass, you will get raises and your income will keep going up. You can have fun now and pay off the credit cards later. Sounds like a good plan, so you decide to join your friends and start living it up.
The first month, instead of being thought of as a “stick-in-the-mud,” you buy some new clothes and join them at a nice restaurant for dinner. They are thrilled and tell you how happy they are that you are finally loosening up a bit and having some fun. After all, you only live once, they tell you.
The first few months are great. You are having the time of your life and the payments on your credit cards are just a few dollars each month. You find this really exciting and you wonder why it took you so long to learn how to live. But gradually, over time, the balances keep creeping up. As more and more money is required to make the credit card payments, your once healthy discretionary funds start slowly shrinking.
Eventually, your balances reach $25,000 and it takes your entire $500 of discretionary funds to make the two percent per month payments. When this happens, you are left with few options. You have to either earn more or spend less. In your individual household it becomes an economic crisis. You’re depressed. You start whining and complaining about your circumstances and wondering how you’re going to make ends meet. Then your credit card company sends you a letter that says they know you are struggling and they want to help. They advise you that they are going to send you $600 cash to help out, but don’t worry; they’ll just add it to what you already owe? Oh, and if you’re married they’ll increase it $1,200 and if you have children, they’ll add another $300 for each child. Absurd, isn’t it?
As absurd as this scenario might sound, isn’t that exactly what’s been happening in our country for nearly 30 years? Now, as the economy begins to falter and people are whining and complaining, government is going to borrow $130 billion, probably from China, and send $600 checks to individuals, $1,200 to married couples, plus an extra $300 for each child. Oh, and they want you to run out a spend it, probably to buy things made in China, and this is supposed to stimulate the economy. Absurd, isn’t it?
Following WWII the national debt was over of 90 percent of gross domestic product. By 1980, high taxes had reduced that number to just over 30 percent. Then President Reagan’s tax cuts were implemented, but they weren’t coupled with corresponding cuts in government spending, the debt began to accelerate. People weren’t willing to give up the government programs to which they’d become accustomed in order to have more cash in their pockets. The wanted both! As a result the debt is now in excess of $9.7 trillion. That’s what happens when you live above your means and borrow in order to do so. It’s bad policy, whether it’s your personal finances or the government’s.
Throwing more borrowed money after borrowed money that’s already been spent isn’t going to make things better. Sure, this gush of money may mask over the real problem for a little while and give us a false sense that things are getting better, but just like living it up on your credit cards; eventually the bills must be paid. Until we are willing make a choice between higher taxes or less government, we’re going to continue down the road to financial ruin. It’s not rocket science! When you continue to spend more than your income, eventually your ability to borrow is reduced or destroyed and you will be forced to face some hard realities.
Here’s a tip! The decision has already been made to send everyone some cash to spend stimulating the economy. If you spend it, you’ll only be adding to the problem. Since you can’t stop the government from borrowing, at least use the money to get your personal finances in better financial condition. Use it to reduce your debts or if you don’t have debts, save the money. Eventually you’re going to need it to cover the higher taxes it will take to pay off the government’s debt.
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