The Federal budget deficit isn’t hard to understand.
Imagine you and your spouse decide go out to dinner at a restaurant with another couple; for convenience sake agree to split the bill in half. If the other couple is having pasta and drinking tap-water, you’d be jerk to order the filet mignon and a bottle of expensive wine, knowing that the other couple is paying part of your bill. Do this more than once, and your financial arrangements would change.
Now imagine a neighborhood supper club. You and the folks on your street hold a pot-luck once a month. Every month people bring chili, or stew, or salad. But one family never seems to get around to fixing anything substantial—it’s just chips and a couple bottles of Coke. Eventually, someone will find out if there’s a problem of if that family is just freeloading. Either way, things have to change.
The problem with Federal spending is we’re having a giant potluck every day with 300 million other citizens. We don’t know each other, but we see this giant entity called “the government” providing dinner, lunch, health care, education, and all sorts of things. If you think your neighbor is having the filet mignon and you’re paying, you feel like a sap for not ordering the cannoli. So you order the cannoli, and the bill just gets bigger. Since this is the government, it’s hard to change the arrangement.
Government spending used to be constrained by custom, when we knew each other. Then it was limited by the Constitution–but that seems to be less effective today. So now we depend of “cliffs”: debt ceilings, government shutdowns, sequesters, and so on.
Where does it end? America cycles between activist and limited government. We’ve been trending towards more for almost 20 years. Turns come, but finding them is tough.
Douglas R. Tengdin, CFA
Chief Investment Officer