20. February 2015 · Comments Off on Government Spending · Categories: Economics, Politics · Tags: ,

This chart shows government spending from 2000 – 2015.  As far as I can tell, there are no tricks, no hidden or partial contexts, no percentage of GDP… Just straight up spending measured here in billions of U.S. dollars.

source: tradingeconomics.com

As you can see, there is a huge peak in 2010. This peak was in the headlines almost constantly and when it wasn’t you could still hear the hum of angry citizens fuming about government spending. Well, I just wanted to share this… Government spending appears to have been decreasing since then.

02. February 2015 · Comments Off on Why the National Debt was excluded from the 2015 State of the Union Address · Categories: Economics, Politics · Tags:

In January 2015, President Obama delivered his State of the Union address and during that speech he said that all economic indicators show that this country is better off now than it was when he took office. In the subsequent press conference a reporter asked Press Secretary Paul Earnest if Obama was including the national debt in the set of economic indicators, a question enforced by citing the 70% increase in the national debt since Obama took office.

Obama did say that all economic indicators suggest we are better off now than when he took office. Perhaps it was unfortunate that he didn’t actually explain his exclusion of the national debt as an economic indicator, but then again, he only had so much time to address the entire nation. He can’t spend all that time catering to the less-versed minds of people who don’t understand the exclusion and it makes sense to me that he would leave that task to the press conference.

I’m not that impressed by the way Paul Earnest responded to the question though. I think I would have been more prepared to answer that specific question. First, I would have started by giving the reporter a straight yes or no answer to his very simple question and THEN I would have explained the reason for it. Here’s what my response would have been along with a chart that I would have brought to the conference to make the response as clear as possible.

“No John, he did not include the national debt. He was referring to the economic indicators that reflect the performance of his administration which is after all the topic of his discussion at that point in his speech. The reason why the national debt is excluded from this set of indicators is that it does not necessarily reflect the performance of the current administration… it is instead, a running total of all obligations initiated by all administrations, past and present minus all payments made on those obligations. Now, I understand your point about the 70% increase on the President Obama’s “watch”, indeed when he took office, total debt stood at $10.6 trillion. Since then it has increased by almost $8 trillion, which is roughly 70%. At first glance, you might think the only way $8 trillion can be added to the debt is through additional spending, but it’s not. Roughly half of that $8 trillion comes from a deficit pattern that was set before 2008. In other words, when President Obama took office, he was handed a deficit created by government obligations that far exceeded government revenue. So even if we cut new spending to $0.00, that preexisting gap would continue to pile on debt and the only way to close that gap is to increase revenue by raising taxes or decrease the obligations initiated by the previous administration through a breech of contract. The other half of that $8 trillion does actually come from new spending, but that spending has dropped by two-thirds since 2008, as indicated in the current deficit.”

Now that took 211 words for me to explain… I can see why Obama decided to leave such explanations to the press secretary when so many Americans already do understand this.

12. February 2014 · Comments Off on Raising The Debt Limit · Categories: Economics, Politics · Tags:

To raise or not to raise. How is this even a question? For those of you who know how politics works, the answer is simple… anything that is put to a vote becomes a card in the game we call politics. “I’m not going to give you my vote unless you give *ME* something.” The reason why the question even becomes a card in the first place requires an understanding of a very simple concept. In a nutshell, it doesn’t matter how much debt you carry as long as you make your payments on time. If you don’t make your payments on time, you loose credibility.

Unfortunately, our government doesn’t have the cash to pay off what is due, so the idea is to borrow more money so they can – and since the government has already reached it’s self-appointed debt limit, they need to raise that limit first. This may sound insane, but  it’s really no different than what millions of Americans are doing when they use credit cards to pay their overdue bills. They are borrowing more money to avoid the immediate consequences of not paying what is due. And yes, it *is* insane, but I think most reasonable people will find that in general, it’s better to carry more debt than to default on payments. As long as you make your payments on time, you can carry an increased debt at least until you come up with a long term solution, which shouldn’t be hard to recognize… it’s called living within your means.

Of course for a non-profit government like ours, the only means available is tax revenue. So then, to live within it’s means, the government should spend no more than what it gets in taxes, right? So why can’t our government do that? Is it just spending too much money? Is it wasting money? Is there some corruption going on? These are the same questions a CFO in the private sector will ask of a company’s operations, which can be roughly equated to the obligations of a government. It’s not unusual to find waste, corruption or both in corporations as well as government, but since corporations are private affairs we tend to hear less about it. Another thing a CFO will look at is operating costs.

The operating cost of the government’s obligations are without a doubt escalating. And why wouldn’t it? The government still has to buy supplies and equipment from the market just like any corporation does – it still has to pay it’s workers, just like any corporation does. In fact government is just as affected by prices up the supply-chain as any corporation is. Then you factor in the the increasing number of customers, or in the case of the government, the increasing number of citizens. So naturally, the cost of a government’s obligations are going to escalate the same way the operating costs for a corporation does. So how does a corporation solve this problem? It seems the most common approach is to pass the cost to the customer through price hikes. Customers might be annoyed but at least the company stays balanced. The equivalent solution for a government of course is to raise taxes, but this isn’t what’s happening. In fact, while our population was getting more expensive to serve, the government has actually been cutting taxes and therefore reducing it’s means. So the only other sensible option then is to cut the operating budget to stay within the shrinking means of a tax cutting government, spending has to be cut accordingly and as we just saw, neither the Democrats nor the Republicans want to cut their spending programs. So now what?

Borrow, that’s what. If you’re operating costs exceed your revenue and you can’t change either, you borrow until you can find a way to either expand your revenue or reduce your costs.