|Budget Cuts from the Wrong Side
||[Mar. 23rd, 2011|06:02 pm]
A few months back, there was a law professor who complained that he didn't feel rich, and the proposed tax hikes on those making $250,000 ignored the reality of the situation for himself and his doctor wife and his three children. After all, he could barely pay for all his expenses and still hire a babysitter to eat out occasionally!|
The Internet chewed him out for that, most notably in an article on Slate which said essentially, He thinks he's not rich because he hangs out with the tiny fraction of Americans who are even richer than he is, not the other 98% who are poorer. The meme has recently come back in the form of a a blogger and his lawyer wife, who consider the $250,000 they are earning "much closer to the minimum starting point you need" and not by any means "living the dream." Horrors! But instead of merely dismissing these people as delusional and entitled, I think they are simply committing the same error as our Congressmen: thinking about budgets from the bottom up, not the top down.
The Professor, when contemplating a tax hike of $1,000 per month, thinks first about the things he considers luxuries: the cable TV, the nanny, the lawn mowing service, his daughter's after-school art class. Of course, these are nowhere near $1000 a month in total, so he panics and starts imagining the worst: "We will sell our house – into an already spiraling market of declining asset values – and our cars, assuming someone will buy them." Why such a big jump? Because he's already crossed off everything else in his budget as a fixed, immutable cost. His stock portfolio is "patriotic," the private school tuition is "because I care about my children," and the McMansion in Hyde Park never even comes to mind as an expense. He mentions off-handedly that he and the spouse are carrying over $400,000 in student loans, but doesn't really have a plan to get out from under that crushing burden, aside from getting a raise.
It's easy to point to the Professor's problem: he has aggressively traded money for time and top-quality goods until he has no money left, and so he no longer feels "rich." To restore that inner glow he imagines will come from a bursting bank account is a simple matter of climbing down a rung or two on the status ladder, trading in the house and education he can't afford for the kind he can, plus an extra hour of his life each day spent commuting, plus enough money to put a sizable hole in his debt, or alternately to make him feel better when he goes to the ATM.
The Lawyer has even fewer expenses, being childless and paying $5000/month for rent, but still wakes up shivering with the fear that he will be cast down into the unwashed masses making $50k at any moment. "You can’t invest in anything with the piddling savings you’ve stowed away. You can’t buy anything, other then maybe a family home and a some consumer assets..." goes the rant. He rejects the notion that buying luxuries means you are rich - rather, you are rich "when you can actually afford all that junk." Essentially, he is defining rich as exhausting your opportunities to spend, and also being wealthy, i.e. having a portfolio. He doesn't even consider for a minute not spending as much as he possibly can, concluding triumphantly: "Of course [I could save more money]. We’re middle-class. That’s what middle-class people do: live as far above their means as possible until it becomes impossible." He doesn't even realize this is a stupid idea, and he should - get this! - either stop spending money so fast or move to a cheaper neighborhood and let the "truly rich" have his place in Soho.
Unfortunately, the prevailing view in Congress is that of the Lawyer: Leverage the budget to the hilt, buy everything you could possibly think of buying and don't worry about saving, right up until you are forced to stop. At that point, the Republicans switch over to Professor mode: they look at the smallest, most fungible parts of the budget first, realize it won't make any difference whether they cut funding for NPR, and proclaim the sky is falling. The Democrats are committed to the Lawyer plan: they see no reason to cut spending on anything, because everything they are spending on is worthwhile, and the debt can wait until tomorrow.
Unlike the Professor and the Student, the Country is not living at the edge of her means, she's well into the red. Thankfully, she also has some enormous recurring expenses - military spending, Medicare - that we can cut with only a minor compromise in quality. The problem is, those categories have already been mentally blocked off as inviolate because they are unpopular or difficult cuts - just like abandoning 4700 square feet in Hyde Park is unpopular and difficult.
The silver lining is that now is the perfect time to invest - in infrastructure spending and everything else - to swallow all the jobs we will be cutting to make the tanks we don't need and sell the insurance we don't need. Interest rates are low, unemployment is high, and generally we can employ bridge-builders for less than half what it would have cost in 2004 once you factor in the unemployment benefits and the taxes and the Keynesian multiplier. This won't solve our problems overnight, but it will at least give us a sustainable foundation. Which is pretty good, all things considered.