Magical thinking. In this age of jets and instant communication and the world wide web it is alive and well. In Washington Republicans think they can always cut taxes and Democrats always have more money for programs. A balanced budget is given lip service, but no one wants to spend the political capital to achieve it. A pundit like Fareed Zakaria can make the common sense prescription like he does here in this video, but can he get any politicians to follow his advice?
On the other hand, can we really blame politicians who more than anything want our votes? If they thought we wanted a balance budget and would reelect them once they brought it to us they might actually accomplish that laudable goal. However, when it comes to managing finances at the governmental level we want it to happen with someone else’s dollar, not ours. Keep our programs and don’t raise our taxes; do it elsewhere. But elsewhere to us is always somewhere to somebody else and they have votes too. So the politicians who can’t tell us what we need to hear give us the magical thinking –fiscal fairy tales. So like individuals, large groups usually need a traumatic event to change. David Stockman, the 34 year old budget director to Ronald Reagan who helped create the Republican myth that tax cuts create more government revenues in the 80s who has substantially grayed in the intervening 30 years, and is no longer in politics, has repented in what I surmise is an attempt too save his legacy by telling the truth before it’s too late.
Stockman compares what is going on around Washington to Chapter 11 bankruptcy. It’s more than merely an analogy, because the fiscal solvency of the United States is at risk. A nation like ours has far more resources than a mere individual or company, so I cannot say the U.S. is insolvent nor do I think anyone else can easily, but if the buyers of bonds start thinking so then the Federal Reserve will be forced to raise interest rates and it will choke off growth.
I mention all this in a blog devoted to personal finances and bankruptcy for two reasons. First, our microeconomics are greatly influenced by what occurs at the macroeconomic scale. For example, if the government’s borrowing cost go up, yours are likely to go up as well, whether it is for mortgages, student loans or credit cards. Also, your prospects for economic growth are tied in with the overall economy’s growth at least to some degree. Second, we also have a tendency to indulge in magical thinking without realizing that we’re doing it when we try and understand complex systems such as our own finances.
One of the most important things I bring to the table is an objective viewpoint that questions any mystical, magical or merely fuzzy thinking when analyzing your situation. It’s not that I’m smarter than anyone else. It’s just that I’m trained to ask the right questions to get at the objective reality of your fiscal situation. You’ll be surprised by the specificity in which I get into your case. It’s not as hard as going through the federal budget line by line. Shedding light on the problem may not be comfortable, but it’s the first step in doing something about it.