Easy Explanation of American Fiscal Cliff Dynamics: Household Budget and Family Debt Comparison

London, UK - 12th December 2012, 10:35 GMT

Dear ATCA Open & Philanthropia Friends

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Politicians around the world intuitively understand the importance of translating complicated policy and complex laws into language that non-experts, ie, average voters can understand easily. When it comes to US budget numbers and negotiations, financial complexity can be extremely challenging. Many Americans and non-Americans don’t know how many zeros there are in one “trillion,” much less what a trillion dollar deficit means in terms of the world's largest economy and its overall impact on the global financial markets. In a recent poll question, for example, American respondents were given five multiple-choice answers for the question “how many thousands are [there] in a trillion” and just 21 percent answered correctly, barely more than what one would expect if everyone guessed randomly!

Driving Over The Cliff

Let us take some of the key US economic numbers -- how much money the US government brings in, how much it spends, and how much US Congressmen are “cutting” to bring those numbers into balance -- and simply lop off eight zeros (ie, divide by $100 million) to make those numbers something that American families can relate to:

* US Federal tax revenue: $2,441,000,000,000
* Federal budget: $3,545,000,000,000
* New debt: $1,104,000,000,000
* National debt: $16,366,000,000,000 (Debt ceiling $16.4 trillion)
* Interest paid on this year's deficit: $258,398,000,000
* Not so recent budget cuts in April 2011: $38,500,000,000
* Proposed tax increase ($250,000+): $90,000,000,000 to avoid fiscal cliff
* National US debt on President Obama's first day: $10,600,000,000,000

Let us now remove the 8 zeros and pretend it is the household budget of a family in debt:

~ Annual family income: $24,410
~ Money the family spent: $35,450 ($94.38 a day)
~ New debt on the credit card: $11,040
~ Outstanding balance on the credit card: $163,660 (max set for C/C $163,940)
~ Interest paid on this year's credit card: $2,383
~ Not so recent budget cuts in April 2011: $385
~ Father working overtime to help with the bills: $900 (9.53 days worth of bills)
~ Added to credit card in last 4 years: $57,660 (35% of total)

Fiscal Cliff Negotiations:

* Tax increases, total estimated: $536,000,000,000

~ Translates to the household budget as $5,360 "raise" in family income per year

* Automatic Spending cuts: $1,200,000,000,000 over 10 years or $120,000,000,000 per year

~ Translates to the household budget as $1,200 cut in spending per year

~ Overall effect $6,560 reduction in the $11,040 annual debt added to the credit card per year

~ New revised debt still added to the credit card per year: $4,480

President Obama's Alternate Proposals:

* Tax increases: $1,600,000,000,000 over 10 years or $160,000,000,000 per year

~ Translates to a $1,600 "raise" in family income per year

* Spending cuts: unspecified, vague

~ Spending increases: $50,000,000,000 in the form of immediate stimulus spending

~ $500 per year added to the household budget

* Wants the US Congress to end the debt ceiling rules, because it is used as a leverage tool by the opposition to force spending cuts.

Conclusion

1. Restoring Fiscal Sanity: Even self-described policy experts find this simple approach of comparing US fiscal cliff negotiations in the context of the average US household budget and family debt eye-opening. It is harder to pretend that the leadership in Washington DC is serious about restoring fiscal sanity when the proposed budget cuts are seen in the context of balancing a given household's budget and tackling that family's debt.

2. Elephant In the Room: Of course, there is no mention of the elephant in the room! Total unfunded US liabilities are $86,800,000,000,000 including Social Security, Medicare, and federal employees' future retirement benefits, which is more than all the printed money in the world many times over and equates to over five times the total American debt claimed by the US Treasury Department of $16 trillion. Lopping off eight zeros, this in household family budget terms equates to $868,000 owed prior to the retirement of working members with a combined income of just $24,410 per year. Is this sustainable?

[STOPS]

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[ENDS]

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