Economic Stimulus Package Analogy
Here’s an analogy which helps me understand the implications of the economic stimulus package presently before the US Congress.
- A family’s combined income is $48,000/year.
- Their mortgage payment on a house is $1,000/month.
- Their total monthly expenditures are $4,000/month ($2,500/month non-discretionary, $1,500/month discretionary).
- They have $96,000 of equity in the house.
- He loses his $24,000/year job so their combined income drops to $24,000/year.
- They immediately pull the equity out of their house, which doubles their house payment to $2,000/month.
- They continue to live the same life style and draw from the house equity at $24,000/year to make up for the lost income.
The end-result is that within four years they’ve burned through all the equity in their house in addition to finding themselves:
- Living on half the income – $24,000
- Having a higher ratio of non-discretionary spending ($3,500/month non-discretionary, $1,500/month discretionary
- Having doubled their mortgage payments from $1,000/month to $2,000/month
- Extending the payback time of their increased debt
Instead of immediately borrowing to maintain the current economic status, wouldn’t it be wise to first eliminate discretionary spending and try to figure out ways to reduce non-discretionary expenditures? Wouldn’t this be a prudent thing for our government to do? Yet, I don’t see our federal, state, or municipal governments actively cutting expenditures. Perhaps that will come. Right now, however, our government’s main emphasis appears to be “borrowing” additional money in order to keep things as they are.