National Debt – What, Me Worry?

If you care about the country going bankrupt, it doesn’t matter who you vote for. Both parties seem to be indifferent to it. There's only a small difference in the size of their trillion-dollar spending bills.

 

Below are two graphs. The first shows, from the best source I could find, the spending and revenue of the United States over the last 30 years. We actually had a small surplus in the last two years of the Clinton Administration. Then things went south. Bush started a couple of unnecessary wars and added Medicare Part D. Obama continued those wars, failed to take ISIS seriously and threw in some stimulus. Trump wanted to build up the military, already the largest in the world, but the democrats would only agree if they got a proportional boost to their favorite domestic programs. The lines clearly show what happened. 

 

 

Just as a thought experiment, suppose the rate of increase of federal government spending had remained the same as it was from 1990 to 2000 under Bush (R) and Clinton (D) – not the same level of spending, but the same rate of increase. Here is what that would have looked like. 

 

Even with the two tax cuts that politicians told us would cause huge problems; many of those years would have run a surplus fed by growth in the economy over the past 8 years or so. 

 

Now this exact scenario would likely not have been possible due to the increased Social Security outlays as the Baby Boomers hit retirement age. But still, if you ask people over the age of 45 how life was during the 1990s, how well needs were being met; the majority would say that things were fine. 

 

The question is: how much of that extra spending went to real improvement, how much was pure waste, and how much went to buying your vote (using your own money to do it)?

 

We hope for responsible leaders; but when it comes to spending, politicians take the attitude of Alfred E. Newman, the fictitious mascot of Mad Magazine.

Acting and Reacting

Is the world getting safer or more dangerous? Data about crime, wars and accidental deaths indicate that life this century is much safer than it was in the past. These events are very noticeable and easily measured. On the other hand, we often ignore or excuse less immediate dangers that arise as our interactions with the world become more complex.

As I have been describing behavioral examples of errors in the five key dimensions over the last 10 years, it becomes clearer that much of the human race is still attacking twenty-first century problems with cave-man level of skills. Just as the hunter-gatherers required immediate reactions to survive, when they heard a rustling in the bushes that may or may not be a snake or predator, humans retained those instincts, following a course of acting first and analyzing later. 

Likewise the practice of not trusting or even attacking people from a different tribe or with a different belief system carries over today in many forms. “My god is better than your god” is not necessarily ancient grounds for confrontation. It happens in a modified form daily on social media.

These instant reactions and mini-superstitions come to us immediately, before we have a chance to engage our critical thinking. Thus critical thinking is often omitted from our decision process, used only to justify or rationalize actions after the fact.

Several recent books describe this psychological phenomenon in detail: Thinking, Fast and Slow by Daniel Kahneman; Nudge, by Thaler and Sunstein; and The Power of Habit by Charles Duhigg are among them. They tell how, as humans evolved, we developed mechanisms to be able to make quick decisions in times of panic or emergency. We react instantly, responding to emotional triggers often before we are aware of them. We are more comfortable following our established patterns of behavior. These programmed, intuitive reactions saved our ancestors, but they serve us poorly today.

That explains in part the need for COVID-19 bail out packages. According to Market Watch: “A shocking number of Americans are living paycheck to paycheck.” One survey says it’s at least half, another estimates 74%, as “one in four families making $150,000 a year or more are living paycheck-to-paycheck” and three in ten families having no emergency savings. No wonder it’s a crisis! The article says people are struggling.

This problem keeps coming up year after year, yet there is no change. 

Apparently what people need is something called financial literacy. An article in Ideas.TED from late last year asks: How financially literate are you?” and tells “3 things you should know about your money.” These three things are not close to rocket science: knowing how much money is coming in vs. how much you are spending; knowing your credit score and knowing how much credit card debt you have. Do we really need seminars and newsletters to teach people how to spend less than they earn to have a little left over at the end of the pay period or to read a credit card bill? These are third-grade skills.

Don’t blame it on credit cards or the eagerness of banks to lend customers more money than they can afford to borrow. These excuses are a cop-out. But this problem arose only in the last half-century or so. The world gets increasingly complex while we still try to cope using our cave-man instincts, act now and analyze later.

Critical thinking does not come naturally. It’s hard work and can sometimes be unpleasant. But it’s increasingly needed to keep up with the new products and services that technology throws at us at an ever-accelerating pace.

No Magic Money Tree

For years I have been patiently explaining how unbelievable it is that people go through life putting their faith in some magic money tree to take care of their problems. They spend instead of save, then stress about the cost of education and retirement. They expect a lifeline to bail them out – money off some magic tree. Buy now, pay later, and don’t worry about the consequences, just continue to borrow and play the lottery.

As the government increases spending, it makes no impression on them except to feel good that some people are getting more goods and services for free. If a big business is fined or sued, people assume there is some invisible bank account to cover the expenses. (Maybe the CEO will take a pay cut.) Americans fail to see the unbreakable link, either direct or indirect, between these expenditures and their own wallets.

Here are the facts. There is NO magic money tree! The money always comes from somewhere, and that always has ramifications for every single citizen: higher prices, higher taxes, a sluggish economy or a bigger share of the National Debt. The poor are usually disproportionately hurt.

When the business gets an unexpected expense, they raise prices and pass it along to their customers. This is easy when it’s due to a new government regulation that affects the entire industry. No one has an advantage, and everyone’s prices go up to cover the added cost. If it affects only one company and raising prices makes them non-competitive, they risk going out of business or downsizing, and people lose jobs.

When the government increases spending, it comes from taxes and debt. For many years lawmakers seem to have more interest in using some combination of lower taxes and increased spending to buy votes than in acting responsibly. (In fact, they characterize a lower than expected increase as a “cut.”) This has pushed the National Debt to unimaginable levels, currently over $26 trillion. Now Congress is fighting with the President over whether to spend $3 trillion or only $1 trillion on another emergency COVID package! Where do they think that money is coming from? 

The debt, in the form of government bonds is interest-only. Payments do not lower what is owed. Growing debt leads to more interest, which holds back economic growth. Fiscal irresponsibility can lead to inflation, which also affects everyone.

Many economists tell us not to worry, despite what happened to Greece in the recent past when their debt got out of hand. In 2017, years after the initial crisis, its economy grew by only 1.4% with unemployment around 22% and one-third of the population living below the poverty line. The EU bailed them out to some degree, but there is no entity big enough to bail out the US.

It’s a simple matter of critical thinking to understand that this issue is going to become a crisis some day, but as the problem grows, no one seems concerned. Behavior has not changed. Politicians still win elections by promising more spending and programs. Even numbers in the trillions get a ho-hum response. 

Everyone must assume there is some magic money tree somewhere; but there isn’t. 

Buy Now, Pay (or regret) Later

Usually on Black Friday I write about perspective – that any deal on electronics is not worth the life of the person trampled in the stampede. Another aspect of perspective is appreciating what we have and not constantly yearning after more or bigger or newer. The problem is that understanding the difference between wants and needs is only a first step. It must be followed by the discipline not to ignore reality by buying something anyway, especially something you can’t afford.

What seems to be catching on today is a new gimmick called point-of-sale installment loans. “This holiday season, it's not enough to spot a great Black Friday deal on a big screen TV or a sweater. You need to consider whether you want to take out a loan at the checkout, too.” 

That’s right; shoppers no longer need to go to a bank for a loan to buy something they can’t pay for. An installment loan at checkout breaks the cash register receipt into a number of easy monthly payments. That service is now available at Wal-Mart and at many other retailers, both brick-and-mortar and on line. And installment loans are expected to be “hot this holiday season, as retailers attempt to drive sales and shoppers demand easy-to-understand credit.” Retailers are partnering with finance companies to give shoppers these loans, even to people who might not qualify for regular credit cards. Instead of paying at the time of purchase, shoppers can take the items home and pay in 3, 6 or 12 monthly payments.

This is not a new idea, but was usually limited to big-ticket items. Furniture stores have used it for years. The problem is that the eventual monthly payments add up to more than the original price – sometimes 20% or 30% more. 

Not paying cash at checkout is not new either. Credit cards made that possible years ago, and both arrangements involve interest. But shoppers generally ignore the interest in light of the convenience and recognize some advantages over credit cards. Installment loans have no late payment fees, which are a big revenue source for credit card companies, and people tend to like the idea of a predictable, fixed amount each month.

It really is the same idea as a mortgage or car payment, but now the idea is moving downstream to less expensive purchases. Another source says installment plans have a “wide appeal but resonates most strongly for debit users. Four-in-ten would consider using an installment plan for everyday purchases like groceries and household items.”

An American Banker article has another explanation for the trend; “many younger Americans are uncomfortable carrying credit card balances, partly because they saw their parents struggle with debt during the financial crisis and prefer the more certain repayment terms of installment loans.”

This brings up a few issues. First, the financial problems of the parents of younger Americans were not the fault of the credit card. They were problems of discipline and perspective. Going into debt in a different way is no guarantee of success. Since installment plans have no late fee, what do they do instead, send debt collectors or repossess the sweaters and Christmas toys? (This is not addressed in any of the stories.)

In effect, this is just another marketing ploy to get people to spend money they don’t have. The example in one of the articles was of a woman who bought tires from Wal-Mart. She was all right with paying the $644 in three monthly payments of $224, but she “doesn't remember the interest rate.” (It’s about 18% APR.) In this case, tires were probably a necessity, but sweaters, purses and toys?

All this is happening while U.S. household debt, according to Motely Fool, reached $13.54 trillion earlier this year, “an amount that has risen for 18 consecutive quarters.” 

Wake up America; debt is debt! Have a happy Black Friday, but don’t do anything foolish.

Where the Money Goes

An email arrived last week in my inbox that I had trouble believing. If it had not come from a company I was already doing business with, I’d have sent it straight into the spam bin.

The email was from one of my credit card companies suggesting that I “make tax season a little brighter. Simply use your [credit card] to pay for your federal or state payments online and you’ll be rewarded.¹^,² Not only is the process fast and secure, you’ll earn valuable points you can redeem for travel, gifts and more." (Footnotes say that only some states accept credit card payment and that additional fees may apply.)

There was a time when financial advisors would urge, even beg, people to use their tax refunds to pay down their high interest credit card debt. Now we get the opposite; pay the taxes on time with the credit card, so instead of paying interest and penalties to the government for late payments, we open up the possibility of paying interest and penalties to the card company. This seemed pretty crazy until I noticed some of the other financial decisions happening across the country.

This recent USA Today piece tells a scary story. Many Americans have gotten into the habit of ignoring the total price of things they buy. If they believe they can fit the monthly payments into their budgets, they go ahead with no consideration of overall cost, including interest on the loan. 

The particular example here is car buying. In one expert’s opinion, "Easy credit and longer repayment terms have coaxed many consumers into buying more car than they can really afford," causing car debt to reach an all time high of $1.2 trillion. 

One banker remarked that his company limits auto loans to 72 months, but some competitors offer 84-month loans. That seems a little strange as the average length of car ownership hovers around 80 months. It’s more like renting a car than really owning one (and owing more than it’s worth for almost the entire time). But this mindset is to look at the monthly payment, to ignore the regularly increasing interest rates and to buy as much car as fits the budget. So people can be easily drawn to the midsize SUV rather than a midsize car with a price difference of almost $13,000, just increase the length of the loan.  Meanwhile GM is forced to close a small car assembly plant in Ohio due to fewer buyers. (Then the price of gasoline goes up, and everyone  starts complaining! Whoops, behavior has consequences.)

What most don’t realize at the time of purchase is that the car is collateral for the loan. One downturn in the economy or one temporary job loss for any other reason could mean losing the car no matter how faithfully payments were made up to that point. An example from the article tells of a 26-year-old, who lost her job at as a legal researcher and was unemployed for two months. She went into default and her 2010 Chevrolet Equinox was repossessed. That is not an isolated case. “More than 7 million Americans are now at least three months delinquent on their auto loan payments, the benchmark for many lenders to trigger a repossession.”

The behavior continues. Credit cards offer deals to help you earn “valuable” points, while banks and finance companies offer longer and longer loan durations to keep payments down (and their profits up). Everyone thinks in terms of installments rather than total cost. When the shocking news comes that you can’t buy a retirement on those same terms, it’s too late. The consequences of poor economic understanding coupled with poor critical thinking will be devastating. Everyone will be looking to the government for a bailout, a government with the same attitude of buying now and borrowing to make up the difference with no concern about the future.

A Closer Look at Spending

Back in June I posted some graphs that I created based on data from the Federal Reserve Bank of St. Louis.  The point was that the government seems to have the same problems with discipline as many citizens. Their appetite exceeds their resources. They spend for today often without distinguishing between wants and needs while pushing the consequences to the future - sometimes referred to as kicking the can down the road. 

A close look at the numbers shows that moderate austerity should have been fairly easy and that following a more conservative pace would have left the country in a much better position. 

Last time I posted this message on a Friday, and it ran over a weekend.  I thought the information was important enough to show again.

   

My source was the Federal Reserve Bank of St. Louis website: quarterly government expenditures and receipts, seasonally adjusted from 1^st Quarter 1990 to 1^st Quarter 2018.

The first graph shows government expenditures.  There is an apparent acceleration in spending shortly after 2001. The slope changes noticeably. 

The next graph shows that the increased spending was real and sustained.  By taking the average quarterly increase for the 1990 to 2000 and applying it to the rest of the data, I showed (in red) what would happen if the spending had increased at only the same percentage rate.  It's still an increase but not nearly as steep. (The blue shows actual spending from the above graph, so the apparent increase was real!)

That's the spending story.  Now see what happens when we add government receipts (overlaid in green). There was a budget surplus in the late 1990s and even with the tax cuts of 2001, there would have been another from 2006 to mid-2008, had the spending not gotten out of hand.  And again around the 2013 - 2015 time frame any deficit would have been minimal.

Just like that new car or vacation we can't really afford, the new government programs seem to be too tempting to pass up. It seems painless because borrowed money today doesn't have to be paid back until later. But as we know from our personal experience the consequences are just around the corner. Unfortunately the decision makers may be long gone when any government consequences arrive. It will be our children and grandchildren left to pay the bill.  This shows a lack of discipline, perspective and responsibility 

When Numbers Get Too Large

There is a concept in probability called the Law of Large Numbers.  Basically, it says that the more attempts you make at a measured activity, the more accurately you will understand the distribution of that activity.  For example, you may get a lucky streak at a casino or racetrack and come out ahead on a given day; but if you play long enough, you will lose.  The rules of the game stack the odds slightly against you.  Short term streaks occur, but results are predictable in the long run.

If you toss a coin ten times, you will get an equal number of heads and tails only about one in four tries.  More than 75% of the time you would get a different result.  But toss it a thousand times and the chance of getting closer to 50% heads and 50% tails is much better.  As you increase the number of coin tosses (or any similar activity), you are much more likely to be close to the expected outcome.  The same is true of experiments and studies as I have fussed about many times in the past when writing about science and medicine.  The bigger the sample size or number of trials, the more likely the results will be consistent with real life.

But I have created a different law of large numbers.  It states that it is almost impossible for anyone to really understand numbers greater than one million.  To most people numbers commonly tossed around in politics and science, like billions and trillions, are just words designating a big number or a whole bunch.  Even one million is beyond the grasp of most.

A million is a thousand thousands.  Counting to one million at one number per second nine hours a day would take a month – not time very well spent.  A stack of a million one dollar bills would stand almost 360 feet high and weigh over 1.1 tons.  A million of anything (or one chance in a million) is extremely hard to picture.  Such a large number means very little to most of us in real terms.

Now a billion is a thousand millions.  Politicians in Washington talk about a billion dollars as if it’s pocket change – a billion here, a billion there.  Here is an example given by a teacher to a class of seventh graders.  “If I gave you $1,000 a day, seven days a week, how long would it take you to collect 1 billion dollars?”   Most guessed around 4 years.  The answer is 2,737 years, 10 months, 7 days.  If this exercise started in the manger on the first Christmas, you would still be over 700 years away from collecting your billionth dollar.

A trillion is a thousand billion.  Count all the hairs on all the heads of everyone in a football stadium.  That’s a measly 6 billion or so.  To get a trillion of anything, load 38 and a half dump trucks like the one shown here with fine sand and count all the grains of sand – incomprehensible!

 Photo Credit:   http://www.earthhaulers.com

Today our national debt hovers above 20 trillion dollars.  How big is that number?  If everyone in the US cancelled holiday shopping and sent all that money to pay off the debt, American children would be without Christmas for over 30 years – no tree, no lights, no presents, no special meal, just empty stockings for a generation and a half.

Perhaps the lack of urgency about government spending is due to the fact that those numbers are so big, bigger than anyone is able to grasp or imagine.

This and That

Critical thinking leads to some interesting questions and observations.

A friend recently asked me why he has to pay for syringes for his wife’s diabetes injections while drug addicts on the street can get them for free, funded by taxpayers like him.

How can people plan to pay for their children’s education or their own retirement when they can’t even plan for an annual vacation?  “According to a survey by financial planning company LearnVest, 74 percent of Americans have taken on debt to go on vacation.  The study surveyed 1,000 adults. It showed that, on average, Americans take on about $1,100 in debt for each vacation.”

The article adds:  “Around 55 percent of Americans forget to plan ahead for vacations when setting their budget for the year, according to the survey. It also shows that one-third of Americans would rather save money for a vacation than for a house or retirement.”  (See my earlier comments on vacation planning and gasoline price.)

People are puzzling about the drastic increase in overweight pets.  An analysis from veterinary clinics across the country of about 2.5 million dogs and 500,000 cats treated last year found an increase of more than 150% in overweight dogs and cats over the last 10 years.  About 1 in 3 are either overweight or obese.  The only surprise here is that they are still doing better than their owners.  (Can I say owners or do I have to call them pet parents for fear of offending someone?)

What is the city council of Minneapolis thinking?  They want to “require stores to charge a fee for any type of bag — paper or plastic — they give out.”  Can’t they see that this will hurt the poor the most?  Don’t they know that more people know about recycling than know that cloth grocery bags should be washed out periodically to avoid cross-contamination?

Two studies, one from University of Washington and the other the University of California, Berkeley, about the effects of the first tier of minimum wage increases in Seattle came to different conclusions.  One says it hurts the workers; the other says the workers benefit.  But Forbes reports there are “potential problems with both studies.”  The jury is still out and many economists do agree that the potential success or failure will be influenced by factors unique to the Seattle economy.  This is why it’s so important to conduct most of these experiments on the state and local level, rather than trying to impose a one-size-fits-all solution from Washington, then wring our hands as flaws later appear.

Here is a link to an informative table.  It shows murder rates by state by year from 2001 to 2015 with highlights showing which states had the death penalty (also by year).  It appears that the death penalty has no effect at all on the murder rates, even looking at data from individual states that banned it during that time period.  But some persist in defending capital punishment despite the fact that besides apparently not deterring crime, those cases are many times more costly than comparable cases.

Also interesting is that, despite what we might hear on the news or from politicians, the overall murder rate in America is half of what it was in 1980.

It’s a strange world we live in.  We all must be critical thinkers and question rather than passively accept any idea just because it sounds good.