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When you hear about government finances and spending in the news, it's easy to get lost. The terminology is strange and confusing, and every issue is so politically charged that half of the facts we hear are badly distorted, or outright lies. Additionally, the numbers are all of a scale that we simply don't deal with in our daily lives, billions and trillions and fapillions. Which means that most of the analogies that we try to make between government finances and our own personal finances are grossly inappropriate. In the end, shockingly few people understand what the government actually does with its money, and even our ability to read the news is grossly limited.

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[Thinking] "This all looks pretty complicated. I miss being a serf."

Here, then, for the sake of our simple little minds, are some of the biggest misconceptions people have about government finances. Please keep it handy and refer to it whenever you see a bunch of zeroes.

Governments Have to Pay Off Their Debts

In many casual conversations about a government's national debt, you will often hear someone say something like, "Man, the debt's really big."

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Look at all them numbers.

You also sometimes see, as in that image, that someone has divided that number up by the amount of taxpayers, to get a smaller, but somehow more intimidating number, often claimed to be your share. That's way too much money for you to personally pay back, no matter how much you pull your pockets out, and so the implication of this is that the debt is too big and we should do something about it. If not for us, then for our children and grandchildren, who shouldn't have to pay for our extravagant lifestyles.

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This sounds like it makes a lot of sense. We should be responsible and pay our own way. That's how we generally manage our personal finances; people can get in a lot of trouble with personal debt, and constantly racking up more of it is a pretty well-trod path toward ruin. But the analogy breaks down when we look at government debt, because of one slightly weird fact: governments don't have to pay off their debts.

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"Is that true? Can someone check if this guy's right?"

The reason you or I have to pay off our debts is because we one day hope to stop working and retire. Our income will go to zero, and we'll have to live off our savings, which will be kind of tough if that's a negative number. But because a government will never retire, and will (probably) always have a stable and growing income, there's no reason it ever needs to pay off its debt. It can pay off the interest on it essentially forever. For example, the U.S. government still "owes" most of the debt it accumulated during World War II.

O18 via Wikimedia Commons

You can see there how the debt accumulated after World War II never really went away. You'll also no doubt have noticed the massive scary spike on the right, which in its massive scariness strongly implies the U.S. currently has a debt problem. But that graph's not a great way to depict debt. The best way is to divide the size of the debt by the size of the economy, for the simple reason that a country with a big economy can afford more debt. If we do that to the U.S. debt, we get:

O18 via Wikimedia Commons

Which is a little less scary, although as you can see it's still rising quickly, which can't continue indefinitely. The problem is that no one quite knows how much debt is too much. It depends mainly on whether global investors think the country can manage that debt. Some countries get into trouble with very low debt levels. Others, like Japan, manage huge debt loads without any major ill effects. That recent spike in the U.S. debt you see above, primarily caused by reduced revenue from the recent recession, certainly can't keep growing indefinitely. But it's probably not at that point yet; the market is still loaning money to the government at preposterously low interest rates, which suggests there's no immediate risk or even hint of a default or other debt management trouble.

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"I just got off the phone with the global investment community. They're cool with us all getting jet skis."

So there you have it. It doesn't matter how big and scary the number is, and even less what "your share" of that number is. All that matters is whether strange bankers across the world think we have too much of it. And that certainly doesn't seem to be the case yet.

China Owns All of the U.S. Debt

You've probably heard it said several times that China owns all or most of the U.S. debt. Or, if you heard the argument a couple decades ago, it was Japan, not China. This argument's native environment is spilling from an uncle at Thanksgiving, usually as part of a larger thesis about how everything is heading hellwards, possibly in or around a handbasket.

And this is at least partially true. China owns a lot of U.S. debt, something around $1.3 trillion of it. (Japan has $1.1 trillion). Although Americans own more of it, about two thirds in total, that still seems like a lot of money to be owing foreign nations.

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Depending on how much our uncle has drunk, there may also be the stated assumption that China is "taking over," and that they'll soon start telling the government what to do, or just carve a couple new heads on Mount Rushmore whenever they want.

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"We'll do Mao, in full body, stepping on their necks."

But that's not what debt is. Owning this debt entitles China to nothing other than the agreed upon, very low interest rates. So why do they have so much of it? Well, the Chinese economy is largely based on selling things to Americans. A richer American government and a stronger American dollar mean more money for Americans to buy Chinese goods. In fact, just about the only thing they can do with this debt which would cause Americans any grief is to stop buying it, which they won't, because that will hurt them even more. In short, the only significant effect all this debt owned by foreigners seems to have is slightly boosting the racist content of drunken-uncle Thanksgiving speeches.

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"[unprintable] HANDBASKET!"

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The $435 Hammer

In the 1980s there was a lot of concern about the amount of money being spent on defense. And not unreasonably; a lot of money was being spent on guns that possibly could have been spent on non-gun items, like food or spears. Even for people who generally approved of defense spending, there was a lot of suspicion that the government was wasting money. Suspicions which seemed to be confirmed when an audit found that under one particular contract, the government bought a basic claw hammer for $435.

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It was made entirely out of silver and did +2 damage to the undead.

This fit in neatly with what everyone "knows" about the government: It's full of unaccountable bureaucrats signing contracts with exploitative suppliers in candle-lit crypts beneath the halls of power. Later audits found similar cases, like that the government spent $640 on a toilet seat.

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"Will you assholes stop auditing us? Go away. Everything's fine."

Except, here's the thing: The government didn't pay $435 for a hammer. It was an accounting error, part of a complicated contract where the cost of building thousands of parts and tools was split evenly among the individual tools. Something like $420 of research, design, and manufacturing costs were added to the price of everything, whether they were hammers or complex electronics.

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The hammer probably only cost $15, which ... still seems kind of expensive, actually. Still, not too bad, government.

In the case of the $640 toilet seat, that was for a military plane, and was less a toilet seat and more a custom fiberglass shroud. It had to be built to very specific specifications, required custom molds, and the military only needed, like, 50 of them, meaning there was no economy of scale to lower the prices. Recall that it's only when manufacturers can make and sell thousands of toilet seats using the same molds and equipment that prices go down to the levels you or I are accustomed to paying.

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I buy a couple dozen a year.

To be fair, that toilet seat was probably over-specced; even for a military airplane, there were cheaper ways of solving that problem. It just probably wasn't a case of a grossly wasteful contract. But a clumsily specified contract is a less sexy headline than "SHITTER SEAT RIP OFF." Make no mistake: We should under no circumstances give our government a blank check. They can and do waste money, and auditing and oversight are completely necessary. But when the media or a politician on a soapbox start waving around examples like this, the story's often a little more complicated than it seems.

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The Government Prints Money Whenever It Wants

Another thing Uncle Thanksgiving might bring up is how the government can print money whenever it wants, and now our money is meaningless, and something something gold standard dammit.

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And that's true; the government (the Federal Reserve, technically) can print money and does all the time. More accurately, they can just declare that some extra money exists now, and they have it and are going to use it to buy things. That sounds grossly unfair to a lot of people, like, for example, everyone who doesn't get to declare they have extra money. And there are historical cases where this has led to runaway inflation.

But, as it stands now, the government doesn't quite print money whenever it wants. Instead, it's set up rules and guidelines which precisely state when it will print money and under what conditions. Normally, it pays attention to the interest rates everyone uses when loaning money to each other and then adds (or removes) money from the system to coax us all to loan money to each other more or less, thus affecting those interest rates. This can have some very useful stabilizing and stimulating effects on an economy. And because the government generally follows those rules, and everyone trusts that they'll follow those rules, we don't end up with runaway inflation, or bread lines, or people fighting in domes.

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"Two men enter the handbasket, but only one man leaves."
"Go home, Charlie, you're drunk."

When the government can't print more money, when every bit of currency is theoretically exchangeable for a fixed amount of gold (i.e. the gold standard), the government loses these stabilizing effects. Back when the gold standard was in place, financial panics and depressions were way more common, in part because the government didn't have some of the tools we now have to stabilize things. Imaginary money that we all pretend means something sounds like an insane, nonsensical way to run the world. But it turns out to be one of those things that is really super useful.

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The children were onto something all along.

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Everyone Hates Government Spending

Opinion polls on "government spending" routinely show that a majority of American citizens want the government to spend less. The country has a large and growing debt (see that massive, scary spike above), and we can all think of something the government does that is obviously, ludicrously wasteful.

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$48,000: brushing the Statue of Liberty's teeth (twice daily)

And yet, when surveys try to break this down to find out what specific programs people want the government to spend less money on, something weird happens. Essentially every government program is popular, with a clear majority of people approving of the amount being spent on it, or wanting even more. Medicare? Yeah, we need that. Defense spending? We'll probably need some of that too. Education? Yup.

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Gotta train those soldiers somehow.

So how can every program (other than a few relatively small-ticket items, like foreign aid) be popular, but everyone agree that the government's wasting untold amounts of money? It's basic math. If everyone approves of 60 percent of the programs the government spends money on, but they all like different programs, this will result in about a 60 percent approval rate for each program. But every individual will see the government spending money on the 40 percent of orphan-feeding programs they don't like and conclude that the government is wasting money. In short, although everyone agrees the government is wasting money, we'll never all agree on where it's being wasted. Which is fine; that's just clumsy ol' democracy in action. But that means that our zero percent approval rate of overall government spending doesn't mean anything. It might even be a sign of everything working perfectly.

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"So they're guaranteed to hate us no matter what we do?"
"But we can still get $9,250,000 mil-spec jet skis and there's nothing they can do to stop us?"
"I can live with that."
"Vroom vroom."

Chris Bucholz is a Cracked columnist, not a trained economist, and shouldn't be left in charge of anything more complicated than a shoe. Join him on Facebook or Twitter.

For more from Bucholz, check out 5 Life Hacks That Can Change an Introvert's Life and 6 Negotiating Tactics That Actual Professionals Use.

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