Sometimes when we talk about the fiscal cliff or government spending in general, the billions and trillions of dollars can be hard to put into perspective. The numbers are just too big. Here’s an explanation of the fiscal cliff put to the scale of the average American family.
John and Jane Doe are an average middle-class American family. They have one child named Jim. John and Jane have the national median household income for 2011, which adds up to $50,054 per year.
John and Jane have never been good about staying on top of finances. They routinely spend more than they earn. At the end of 2011, they owed a total of $321,450, having spent $78,309 for the year, or $28,255 more than they earned.
John and Jane had to sit down with a loan officer at a bank. The Doe family has been with this bank for a long time, and the bank wants to try to help them out. The loan officer told them that he would let them roll the $28,255 into their mortgage if they would come up with a long term plan to cut their spending and increase their income so they could be on a safer financial footing in the future. He realized that they would probably not come up to speed immediately, but to get them moving in the right direction he demanded that they cut their spending for 2012 by $4564. This was a lot less than the $28,255 they really needed to cut, but he wanted John and Jane to at least make a token effort. The loan officer identified $1993 in spending cuts and told the family to find an additional $2571 to cut from their budget by the end of 2012. He had them sign a contract to that effect. The contract also said that if they chose not to actually do that, the bank would start to garnish $2391 from their wages.
John and Jane liked their lifestyle, and they didn’t want to change things. Once they left the bank, they put the contract out of their mind and returned to business as usual. Jane got a raise at work, so the Doe family earned $53,662 in 2012, seven percent more than the year before. They thought to themselves, “the bank should be proud of us, we did better than last year.” When they totaled their expenses for the year, they realized they had spent $82,438. This adds up to $28,776 in excess of their income. John and Jane had actually increased their spending rather than cutting it, so the bank officer said, “Enough is enough. We’re taking your wages because we don’t trust you to be financially responsible.”
John and Jane were furious, and told all their friends that the bank was taking advantage of them by enforcing the contract they signed. “If only the bank was willing to compromise a little to help us out, we wouldn’t be in this mess.”
The Reality of the Fiscal Cliff
That’s the fiscal cliff explained in terms every American can understand. All I did was collect numbers of government debt, spending and revenue from Fiscal Year 2011 and 2012 and the explanation of theBudget Control Act (which created the fiscal cliff scenario) written by the Congressional Research Service. I then used those numbers to create ratios and applied those ratios to the 2011 median income. This is the scenario you would have if an average family behaved financially like our federal government. The reality is, no bank would ever accept such a huge financial risk, but the government doesn’t play by the normal rules we all have to live by. No wonder we are in such a mess.