About Me 0079: personal finance budgets

Intuit-owned Mint.com is heading to schools today with the launch of a free, online program designed to educate middle-school students about personal finance and financial management.

Mint has partnered with educational publisher Scholastic to develop materials that parents and teachers can use to teach children the ins and outs of personal finance management. The materials includes lesson plans as well as an interactive game, to teach children money management, budgeting and goals.

For example, the program teaches children the concept of compound interest with real-life math problems, and encourages children to set goals and budgets with their own current work opportunities (i.e. babysitting).

Mint says the curriculum will be expanded to 30,000 classrooms nationwide early next year. Considering the state of the economy and credit, teaching children financial literacy and sounds personal finance practices at an early edge is an incredibly important initiative. In terms of branding, this is a big win for Mint, which can start building awareness of its tools among students at an early age.

I've mentioned this piece a number of times now, from Roger Altman and Richard Haass, "The Consequences of Fiscal Irresponsibility." The introduction provides the background to America's massive fiscal overhang, and then this:

It is important to understand the impact of all this debt. As it grows, interest rates inevitably rise. As they do, the U.S. government's annual interest expense -- the cost of borrowing money -- will rise from one percent of GDP to four percent or more. At that point, interest expense would rival defense expenditures. And it would exceed all domestic discretionary spending, a category that includes spending on infrastructure, education, energy, and agriculture -- in effect, anything other than entitlements and national security. The U.S. Treasury would need to borrow a staggering $5 trillion every single year, both to finance deficits and to refinance maturing debt.

Yet the real outlook for deficits and debt is much worse than these forecasts. For one thing, the debt that the United States effectively guarantees but that is not included in official totals is almost equal to the Treasury Department's stated $9 trillion total. In particular, the debt of government-sponsored enterprises is another $8 trillion. The biggest of these are the essentially bankrupt housing finance agencies, Fannie Mae and Freddie Mac. They have been placed into federal conservatorship, and for all practical purposes, their debt is equivalent to U.S. Treasury debt. The American taxpayer stands fully behind it.

State and local governments also owe huge amounts, on the order of $3 trillion. And again, Washington indirectly stands behind much or all of it. This sector is deeply distressed, with the largest state, California, recently issuing IOUs. Moreover, many state and municipal pension systems use an antiquated pay-as-you-go funding approach, which has left them underfunded by another $1 trillion.

The post-2020 fiscal outlook is downright apocalyptic, for two reasons. First, the aging of the U.S. population will drive sharp increases in health care costs (and at the same time, more Americans will be retired). Second, federal interest expense will rise exponentially, as the Treasury's borrowing costs grow with the debt. The Congressional Budget Office projects that official federal debt (excluding government-sponsored enterprises) could hit 110 percent of GDP by 2025 and 180 percent by 2035. Adjusting these forecasts for the inevitably slower growth that would accompany such quickly rising debt levels means hitting those stratospheric ratios sooner.

Why is this scenario so dangerous? One reason is that a large amount of federal borrowing would eat up the stock of private capital that is available to finance investment. A higher and higher percentage of personal savings would be diverted to purchasing government debt and away from productivity-enhancing investments in equipment and technology. This would shrink the base of productive capital and flatten GDP and family incomes. As more and more debt piled up, growth would slow and Americans' standard of living would fall.

In addition, interest expense would become so large as to crowd out whole categories of federal spending. Budgets for research, education, and infrastructure, to name but three examples, would inevitably decline in inflation-adjusted terms. Washington's capacity to respond to domestic crises, such as the recent recession, would also fade. All of this would further undermine families' incomes.

More at the link.

My problem with this piece is that it's way too pessimistic, even for a problem of this magnitude. There's no discussion of how tax receipts rise dramatically during periods of robust economic growth. So should the administration agree to the extention of the Bush tax cuts from 2003, it's possible that a surge in GDP --- with a boom in individual and corporate profits --- could send a significant windfall of revenue to the treasury. This was indeed happening by the last couple of years of the Bush administration, and it's likely to happen over the next few years, now that the GOP has retaken the House. See the commentary at Wall Street Journal, "Liberal Tax Revolt."

And refer to my bullish comments from Saturday on the international aspects of coming growth domestically: "The World in China's Orbit?"

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About Me 0079

Wednesday, December 22, 2010

personal finance budgets

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