Rethinking the Federal Budget and Household Budget Analogy
Sometime this fall - probably in October - the federal government will reach its borrowing limit and we are likely to witness another fierce debate about federal debt and deficit spending. Often in these debates, pundits and others make the claim that since households have to balance their budgets, the federal government should do the same. While this makes for a popular political soundbite, the truth is most households are deficit spenders with debt loads just like the federal government. Just ask yourself if you, or anyone you know, can afford to buy a house or car, or go to college for that matter, without taking on debt.
While there are significant differences between the federal budget and the household budget, they both clearly rely heavily on deficit financing in order to function. For example, according to the U.S. Census Bureau, the median household debt in 2011 was $91,000 while median household income in that year was just $50,052. This means that median household debt is nearly twice as high as median income or about 180 percent of median household income. Conversely, federal debt held by the public as a share of the economy (GDP) in 2012 was 73 percent, according to the Congressional Budget Office. Looking a gross public debt this number jumps to 102 percent.
Some might say that this is an unfair comparison because we are not including assets or looking at the net wealth of the households or government. After all, many households may have large mortgages and car loans but the also have equity in these assets. While this is true, how often do we look at the assets of the federal government when looking at its debt burden? Almost never. But we should.
Again, according to the U.S. Census Bureau, the median net worth of households in 2011 was $68,828. This number reflects the total value of market assets ( homes, vehicles, cash, savings plans, etc.) minus liabilities (shown above as secured debt) owned by household members.
Trying to figure out the net worth of the federal government is not an easy task. According to the US General Service Administration, the market value of federal government real property (building and structures) was $1.26 trillion in FY 2005. The federal government also has about $1.4 trillion in financial assets.
The federal government also owns a lot of minerals. According to the Institute for Energy Research, the total value of federal mineral holdings (oil, natural gas, and coal resources) is worth $150.5 trillion. According to the U.S. Department of Treasury, total U.S. debt in the first quarter of 2013 was $16.8 trillion. If we compare our federal mineral assets to this liability, this means federal assets are nine times higher than our national debt or that the federal government has a net worth of $138.7 trillion.
What all of this makes clear is that it is important to look not just at our national and household debt, but also at our net worth. Our assets and our liabilities. After all, this is the standard way accountants assess the financial position of businesses and non-profits. Why not apply the same principles to the federal government?