James:
Reader “X.” wrote an article Re: State Government Debt Levels, in which the author makes the case that the US income to debt ratio is approximately 1:1. I think the author mixed facts to come up with a mathematical equality where none exists. I repeat in totality the paragraph where this is stated:
“The trepidation most of us feel when thinking of the current level of debt (not to be confused with deficit) is likely well-founded. Individuals tend to think of things in relation to themselves; in other words, I earn $56,000 yearly, and I owe $212,000 on my home, and perhaps $12,000 on a car loan. So my yearly income relative to my total debt (good/bad/ugly) is 1:4. So we tend to use a similar ratio when thinking of national debt. As such, we would look at the yearly salary of our State (U.S. GDP $15 trillion (CIA World Factbook 2011)) and a debt of $15.9 trillion (http://www.usdebtclock.org/ ), rendering a ration of 1:1.”
The yearly salary of the United States Federal Government (‘the State’ as the author rightfully labels) is not the GDP but the tax receipts that it imposes (takes by force) from the citizens and companies that it maintains a direct taxing authority).
Not to get entangled in an argument of where the numbers come from (because there are so many sources that do not “match up”), in rough terms the federal government has collected in taxes the past few years about $2.3 trillion dollars per year. Certainly a lot of money, but when matched against what the government is spending each year, about $3.7 trillion dollars, one can see that the debt of the US is not decreasing but that it is increasing. In the current administration, the published debt has increase over $5 trillion dollars to where it stands somewhere near $16 trillion dollars. (This of course does not address the shadowy ‘unfunded liabilities’ that are estimated between $61 trillion (USA Today) to $84 trillion (National Center for Policy Analysis). Who knows where the number truly lies? It is certainly a big number. I digress.)
I suggest it is the tax “revenue” of the government which should be used in the income to debt ratio. Taking the $2.3 trillion in “salary” that US Federal Government has at it’s disposal, and the $16 trillion of “public” liabilities, I would suggest that the income to debt ration of the country is not 1:1 but 1:6.95.
And then of course is the original subject of the article the author was referring too, many of the individual states and commonwealths have their own additional problems. Using the author’s example of California with a $16,000 per capita “obligation” then the families liabilities would not be $224,000 (house) and $12,000 (car loan) but an additional $64,000 (state of California) raising their ratio from 1:4 to 1:5+, and if we really look at this and make a generous assumption that the household gets to keep 70% of its income (the rest of course is tax paid to various taxing authorities) the ratio now becomes 1:7.1. And because I don’t have the time to figure it out, what is the ratio when factoring in the federal indebtedness?
Now the 1:6.9 matches up with the 1:7.1, but not really in anyone’s favor. Hah, I am mixing my own results to create an “equality” where none exists.
Okay, I took the time. $16 trillion divided by every man, woman, and child (315 million rounding up) is almost $51,000 per person worth of “federal obligations”.
The family of four from California really (using gross and not net) $56,000 per year match up against $504,000 in indebtedness for a ration of 1:9.
And to think in states like California the debt burden will only increase, and in the US unless something changes the debt will only increase.
Who wants to do the math on a welfare mother with 6 children and no income? No mortgage or car, that is easy: zero. But $16,000 x 7 plus $51,000 x 7 and now you are talking real money:
$469,000 of public obligation with no money to pay. Oh, that’s right, you and I get to pay for those people as well. There is no ratio with no income. Just an infinite debt in that instance. So, to truly determine a families income to debt ratio, it has to be determined if they are a “maker” or a “taker”. Makers have income, so a ratio can be calculated, takers do not. Suffice to say the money will have to come from somewhere.
Thanks for listening, sorry for the rambling. Do we have to wonder why a lot of the articles in the Economics and Investing section are so downbeat? – Old Dog, Wisconsin