June 22, 2011
The U.S. federal government spent $30,000 per household last year, an increase of $5,000 in two years. State and local governments spent $25,000 per household. Total government spending thus reached $55,000 per household – in a country with 114,825,421 households.
To provide this exceptional largesse, the federal government borrowed $12,600 per household. Without this loan, these various levels of governments would have spent only $17,400 per household – or precisely the spending (adjusted for inflation) that federal, state and local governments required four decades ago.
Economists usually speak in trillions when discussing U.S. government debt. The household economy provides a different perspective. Does the United States really need to spend $55,000 a year per household? Surely it could get by with $42,400 per household, the spending that doesn’t require credit cards. But debt spending is now deeply entrenched. People expect $5 in government services for $4 in taxes as a fundamental (and, in some instances, constitutional) right.
The $55,000 in per-household spending, however, doesn’t begin to convey the full cost of federal, state and local government. For example, the U.S. Small Business Administration, a federal agency, reports that the cost of complying with federal regulations last year equalled $15,000 per household; and California reports that compliance with state regulations equalled $13,000. But these kinds of spending involve some degree of double-counting. In this analysis, we’ll ignore them.
Federal, state and local debt obligations, however, must be counted. For starters, the average household owes $80,000 as its share of the country’s “national debt,” the U.S. federal debt held by people, companies and governments around the world. It owes another $44,800 as its share of state and local debt – even though most states are prohibited by law from running deficits. It owes another $534,000 per household as its share of unfunded liabilities (legally binding promises) to Social Security, Medicare and pension plan recipients.
The per-household share of government debt thus rises to more than $650,000 – or six times as much government debt as personal debt (in mortgages, credit cards and loans). This number closely tracks the lifetime cost of the average U.S. federal public service pension: $700,000.
A precise calculation of per-household government debt is difficult because governments are not required to report fully on unfunded liabilities. (The CEO of a private company would risk jail time for not doing so). But, by some tough-minded calculations, U.S. unfunded liability, per household, now exceeds $1,000,000. Boston University economist Laurence Kotlikoff, who puts unfunded liabilities at $200-trillion, says the U.S. would have to double permanently all of its taxes to eliminate the country’s “fiscal gap” – the difference between probable revenue and probable spending. (He uses this fiscal gap, rather than accumulated deficits, to define debt.)
Confronted with these daunting numbers, U.S. households are doing everything they can to prepare for the abrupt downsizing of the state that lurks ahead. Families continue to pay down personal debt and to save. The Federal Reserve reports that the net worth of the average household increased by 1.2 per cent (to $58-trillion) in the first quarter of this year, taking this measure to its highest level since 2008 (when net wealth peaked at $65-trillion). Household debt fell 0.9 per cent in the quarter, its 10th consecutive quarterly decline; with household personal debt falling to 114 per cent of annual after-tax income, down from 130 per cent in 2007. But household debt still has a long way to go. In 1995, it hovered at 85 per cent of after-tax income.
Canadians have higher personal debt: 148 per cent of after-tax income. But they have lower government debt. How much lower? By crude calculation (divide $274-billion [Canadian] in government spending last year by 12.5 million households), the federal government spent roughly $22,000 per household, paid for $19,500 of it, and borrowed $2,500. By comparable calculation, the provinces spent $24,800 per household, paid for $23,200 of it and borrowed $1,600.
Ignoring currency fluctuation, the United States spent $9,000 more per household last year than Canada spent ($55,000 versus $46,800) – and borrowed more of it ($12,600 versus $4,100). Perhaps this helps explain the strategic warnings from Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney. In the United States, it’s the government that’s more apt to go broke first. In Canada, it’s more apt to be the household.