Founding principle #3 of Weakonomics is based around our government. We spend too much, money isn’t spent in the right places, we don’t tax efficiently, etc etc etc. Today’s lesson is going to talk about how our government spends money. We might go off on a tangent or two, but the best examples will be saved for another day. Remember, this is just an intro.

First, let’s look into how our government gets money. Look at your paycheck, thats how. Over a trillion dollars was deducted from our paychecks, and another $300 billion from corporations. That’s OK for now, we aren’t arguing the point of taxes, but you should know how much the government made last year. This does not include Medicare, social security, estate, state, and local taxes. Those are different buckets. So the government has a lot of money to play with, and boy do they know how to spend it. Each year, before the first Monday of the second month, as mandated by the Constitution, the President submits a budget to Congress. After Congress verifies there’s room to give themselves a raise, and makes a few changes, the budget is approved.

I won’t talk about all the details of the budget. Needless to say, its HUGE. Go here to see a cool chart. Those of us against the Iraq War will notice the largest portion goes to defense spending. I will point out that defense was the largest piece of the pie before the war, and I never had a problem with it. But I do have a problem with the war and the increased spending required to support it. Moving on.

So what is the national debt? There is a popular economic theory that deficit spending can stimulate the economy. We’ll explain what deficit spending is now, and pick it apart next. Deficit spending is spending more than you make. Our general population is good at this and so is our government. The idea is that the additional spending will stimulate the economy and protect against recession. Go talk to your local finance professor to see how it works.

Unfortunately, there is a problem with the theory. For one, the government must borrow money to make up for what it spends over what it makes (national debt). Our national debt is getting close to the $10 trillion figure, with the expected deficit for 2008 somewhere around $200 billion. This is where you’ll start scratching your head: There’s an old joke my finance professors would tell of their economic colleagues.

“How many economists does it take to screw in a light bulb?”
“10, 1 to screw in the light bulb and 9 to hold everything else equal”

What does that mean? It means many economic theories do not account for real world variations. The latin phrase “Ceteris paribus” is used to imply all else equal.

An example of all else equal: I’ll buy a house and make $700/month payments and rent it out for $800/month. Ceteris paribus, I’ll pay off the mortgage and make a profit! But there’s unexpected house repairs, and then HOA fees go up. Property tax increased, and the adjustable rate reset so the mortgage payment is higher. All else equal, it would have worked. But the flaw in my logic was not accounting for the unexpected.

So, on paper deficit spending could work. In practice, you end up with a recession and owing $10 trillion to the world.

I’m going to go into the 5th dimension here so try and keep up.
Our economy has become used to the artificial growth our government has created. The economic stimulus that deficit spending brought us is now considered “normal” growth. The government has no plan to pay off the debt, for fear of stagnating growth. Even with the deficit spending, we have slipped into recession. The government owes money, but can’t create more jobs because of recession, and therefore can’t get more tax revenue to pay off the debt. Why this isn’t the #1 issue of the current election is beyond me. Or maybe it isn’t beyond me, government does not look into the future. Stay in the present and deal with the consequences tomorrow. Eventually, something will pop or deflate. The government cannot control the free market, and at some point the free market will react.

This is not a call to arms, but just a warning. Keep your money in the stock market, diversify internationally, and have an emergency fund. Write your congressman and tell them a plan must be developed for controlling government spending. When you get your “stimulus” package ask yourself where that money came from. When Hillary Clinton calls for a $30 billion stimulus, ask her where that money comes from. Unless she draws a line out of someone else’s budget, it might as well be monopoly money.

Final thoughts. It will take decades, even centuries for an economic cycle to catch up. Economics is a new field compared to chemistry or biology. We do not know the full effect of current government spending, and some of my thoughts are speculation. I’m not fear mongering, but if you went 20 years spending more than you make, eventually it catches up. We can all be blamed. Democrats, Republicans, citizens. Weakonomics.

Related posts:

1. Record Deficit Ain’t No Thang to Obama and McCain
2. Top 10 Ways the Government Can Help Our Economy
3. Weakon 180: Intro to the Fed, Part III
4. Weakon 180: Intro to the Fed, Part II
5. Weakon 180: Intro to the Fed, Part I

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