Friday, August 13, 2010

The Point of Budgeting

I highly recommend comments by Matt Yglesias on the subject of long-term budgeting:
[T]he fact that sitting around in 2010 talking about the 2080 budget is insane. After all, that’s seventy years from now. Long-term planning is nice, but it’s useless unless you have some realistic grip on the timeframe you’re talking about. 
Yglesias goes on to point out the many things that would have been invisible to anyone thinking about the 2010 budget back in 1940, and that budgeting for 2080 likewise misses such things as, he notes, the upcoming invention of the warp drive by Zephram Cochrane (this blog has a policy of always entering into blog threads discussing Star Wars or Star Trek, or Firefly for that matter, but not initiating such topics).  He's absolutely correct.

It's not always useful to compare federal budget decisions to personal or business financial decisions, but sometimes it does help.  No one taking out a mortgage really worries about the total amount he is borrowing; what matters are the monthly payments, and how they fit into current finances, with perhaps a bit of an eye towards those future changes that are very predictable.  So, for example, if interest rates drop, people can suddenly afford more expensive houses, which means borrowing more money.   No one tries to compute what they'll be able to afford 25 years into a 30 year mortgage.


Of course, and here's where a business comparison makes some sense, another question one could ask would be what the borrowing is for.  The federal budget treats all revenues and spending as essentially the same: money in, money out, end of story.  In the real world, however, there's a big difference between spending money for sodas for the break room (flat-out loss, business speaking, although that might not be the only consideration), spending to build a death star  (seems wildly inefficient to most people, but certainly would be good for generating jobs), or spending on warp drive research (low odds, perhaps, but huge financial payoff if it hits).  Anyone taking long-term budgeting as an even slightly serious proposition would be wise to think about those factors.  Or, one can much more sensibly stick to the short and medium term effects of the federal budget, which are mostly about the current costs (to the taxpayer) of borrowing, and the effects (if any) on borrowing for others.  Of course, that would leave all that rhetoric about our grandchildren having to pay back impressive-sounding amounts of money, but we've already had enough fantasy for one post.

5 comments:

  1. Someone needs to initiate a Firefly discussion ASAP. I often wonder if Whedon had any particular historical moment in mind when he conceived of the battle between the Alliance and the Independence. What are we supposed to draw from Mal's hatred of all things Alliance?

    In the opening monologue in Serenity, the teacher explains that the Alliance wanted to bring the savage outer planets under Alliance control so that they could enjoy the advancements of true civilization. Was there some sort of event that triggered the Alliance's action against the outer planets? Or was it just imperial ambition that spawned their action?

    I guess depending on your political point of view you could offer different explanations as to what Whedon is trying to get across. I can see it being king of an anti-federalist thing. But I would be cautious to translate that to anything in real world politics since Whedon is talking about an entire solar system and he gives very little background as to causes and motivations behind the Alliance.

    At this point I realize my post has had nothing to do with long-term budgeting. I guess I agree with Yglesias. I'll be 96 in 2080. So who cares?

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  2. No one taking out a mortgage really worries about the total amount he is borrowing; what matters are the monthly payments, and how they fit into current finances

    Here I thought focusing on monthly payments was for the rubes -- at least they always tell you while car shopping to ignore the monthly payment and focus on the overall cost. To me it matters a lot if you borrow $200,000 or if you borrow $100,000 and get to put the rest in the bank.

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  3. Noumenon,

    This gets to the point about what you're buying with the money you borrow. If what you bought with the extra money is a more valuable house, or a factory that's producing new revenues, then you may well be better off than if you borrowed less.

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  4. Regularly monitoring your budget is very important. You should keep your budget a little flexible to adjust with your current needs. Sometimes you will have to change it according to the circumstances. Review you budget on a constant basis as it is your plan that enables you to meet not only your present needs but also to achieve your long term debt relief goals.
    Budgeting

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