Saturday, February 23, 2013

How Government is Different from the Middle Class

The recent economic contraction and the upcoming sequester have highlighted for me how government thinks and acts differently  when it comes to financial decisions.   Here are some noticeable differences.
  • Economic contraction - With the Great Recession of 08/09, most middle class people cut back on spending and borrowing, either because of necessity or as a precaution to preserve funds.  The government took the opposite approach by increasing spending via borrowing more money. 
  • 2% spending reduction - With the expiration of the payroll tax cut, the middle class has experienced a 2% reduction in income and, therefore, spending.   The middle class solution is to cut back in a non-essential area, e.g. eating out, entertainment or luxury items.   With the sequestration, the government will experience a 2.4% spending reduction.   The government solution is to cut back essential services.   For example, President Obama has already warned that sequestration will cause a reduction in teachers and firemen, which I don't understand since these position are funded by local and not federal taxes.
  • I know if I handled my finances like the government, I would soon be on a path to bankruptcy. But then again, the government can print more money when it needs it.

    For more on Reflections and Musings, check back every Saturday  for a new segment.

    This is not financial advice. Please consult a professional advisor.

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