Tag Archives: family budget

A Perfect Analogy

Don Knebel is one of the lawyer/scholars who contributes to the Center for Civic Literacy’s new blog, and he can be counted on to have wise words for all of us. I particularly loved this one, because–as he notes–people constantly compare the national budget to those of everyday Americans.

Politicians often say that the federal government should emulate families in budget matters.  They are right, but not for the reasons most of them think.  Until the government distinguishes among types of expenditures as families (and businesses) do, we will not be able make sound financial decisions.  Perhaps more important, we will not be able to evaluate the claims of our politicians about the size of our annual deficits.

I particularly loved his analogy to those real families.

The reported deficit simply compares the amount of cash going out with the amount coming in.  So, whether the money is spent for a dam capable of producing electricity for 50 years or a toothpick, the money is all counted toward the deficit in the year in which it was spent.

No family looks at its budget that way.  When a couple earning $50,000 a year spends $100,000 for a new house, borrowing $80,000, they don’t believe they are $30,000 in the red for the year.  They recognize the debt is offset by the value of the house and spread the cost over the expected life of the house or at least over the length of their mortgage.  On the other hand, they know they could be in serious financial trouble if they borrowed the same $80,000 to take their family on an around the world cruise generating no offsetting asset.  Understanding the difference, prudent families borrow for homes but not for cruises.

The average American family understands and acts upon the difference between capital investments and everyday expenses. We should expect our politicians and pundits to  understand that difference as well, and those who don’t–and those who pretend not to understand it–should be sent to a remedial classroom where Don Knebel can explain it to them.