Keeping up with the Joneses

Keeping up with the Joneses

Meet the four person Jones family, which after taxes had $100,000 of income last year. For some strange reason, 15-year old Billy Jones is not allowed to work or earn any income. For some even stranger reason, Billy’s parents give him an allowance of about $50 per day, totaling $18,000 last year. Billy’s parents also gave him a credit card with no apparent credit limit. Billy spent $20,000 last year, therefore running up $2,000 of credit card debt. (Billy is spoiled rotten.)

This year the Jones family expects to have $105,000 of after-tax income. Billy announces that he plans to spend $21,000 this year, the same proportion of the total family income (20%) as last year. His parents shrug and increase his allowance to $18,900, the same 18% of total family income as last year. Billy therefore expects to add $2,100 of credit card debt this year. He also announces that when he was five years old he promised his friends he would drive them wherever they wanted once he turned 16, so he expects his spending will soon grow by $2,000 per year. He explains to his parents he’ll just put the gas costs on his credit card if they don’t increase his allowance.

Billy’s parents look at his credit card statements and freak out. They realize that they co-signed his credit card application, and they are therefore ultimately responsible for Billy’s debt if he cannot pay it from his allowance. They sit down with him to discuss how to bring his credit card debt into line. It’s not the $2,000 of existing debt that worries them. It’s the continued borrowing, and the expected increased future borrowing once he gets his driver’s license next year. They are worried about Billy’s annual deficits and his growing debt. They track his borrowing with a graph they hang on the refrigerator door.

Billy explains that if they are worried about his borrowing, the answer is simple: increase his allowance. That can reduce or even eliminate his future deficits. Next year his parents need to raise his allowance by $2,000 so that his annual credit card borrowing does not increase. It will probably be even more in future years, because he plans to have many friends and drive them many places. Cutting his spending and increasing his allowance will both reduce his future borrowing, and Billy would prefer that his parents increase his allowance because it’s easier and less painful for Billy. This will allow him to keep his longstanding promise to his friends. They’re counting on him.

Billy’s parents realize that Billy’s annual borrowing, his annual deficits and increased credit card debt are not the actual problem to be solved. Billy’s increased borrowing is a symptom of his underlying problem, which is his increased spending. They see why it’s a mistake to focus only on the credit card debt and additional borrowing, because that leads Billy to conclude that allowance increases and spending cuts are equally valid solutions.

A little bit wiser, Billy’s parents now explain that every dollar of additional allowance for Billy means less for the rest of the family. If Billy cuts his spending, his future annual credit card deficits will decline. If Billy’s parents increase his allowance, his credit card deficits will also decline, but the rest of the family (including little Suzy) will suffer. Billy’s parents explain that they care about the promises Billy has made to his friends. They also care about the interests of the rest of the family, and they must balance those competing interests. They tell Billy they are particularly worried about the projected future costs of his promise to drive his friends all over town beginning next year. Maybe he needs to rethink that promise so that he does not make the rest of the Jones family suffer through some combination of higher allowances and credit card debt.

Billy’s problem is not his credit card borrowing. It is not that his allowance is too small. Billy’s problem is his increased spending, now and in the future. That higher spending can be paid either by bigger allowances this year, or by borrowing more using his credit card. Billy’s allowance and his credit card borrowing are the results of his initial decision about how much to spend. Bigger allowances for Billy this year mean less money this year for Mom, Dad, and little Suzy. More credit card debt will require bigger future allowances to pay it off, which will mean less money in the future for Mom, Dad, and Suzy.

Billy’s parents recognize that the combination of an allowance plus an apparently unlimited credit limit lead Billy to make irresponsible spending commitments. They shift their attention and family debate from Billy’s credit card borrowing to his spending habits. They make decisions about how much Billy will be allowed to spend. Once they have decided that, they then allocate that spending between current allowance and credit card borrowing, to determine how much the rest of the family will have available to spend this year, and how much in future years. They still care and are concerned about his annual deficits, and they still track them on the refrigerator door. But they move that graph down to make room for another graph to track Billy’s spending habits. They know that if they get Billy’s spending under control, then the allowances and credit card borrowing will automatically fall into place and the rest of the family’s interests will be protected, now and in the future.

Billy complains about having to cut his spending. Billy’s friends complain even louder, and tell Billy his parents are mean and selfish for forcing him to break a 10 year old promise. And yet as Billy’s parents consider the future of the entire Jones family, they know they are now on track to responsible family finances.

Tomorrow we will look at how Billy is spending his parents’ money and the promises he has made to his friends.

(photo credit: rich kids magazine cover by Dudus Maximus)

24 responses

  1. Isn't the problem with the metaphor that we're all Billy (since Billy is the US Government) since we're all demanding for increased spending on all of the things we like?

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  3. The family is capitalism and billy is the government. Billy seems awfully without morals. Yet Billy has nuclear weapons perhaps capitalism is making the right call. :p

  4. Not the way I see it. We (the citizens of the USA) are split in this metaphor. Those who pay federal income taxes are represented by Billy's parents. We are funding Billy (congress) and enabling him to make outlandish promises to his friends. Billy's friends, on the other hand, represent those who do not pay federal income taxes. They continue to vociferously demand additional favors from Billy since, after all, they don't have to pay for any of them.

    Sadly, where the metaphor breaks down for me is that Billy's friends (those who don't pay federal income taxes) get to help decide (by voting for congress-Billy) whether or not Billy has to modify his behavior. We're rapidly reaching the point where Billy's friends get to outvote Billy's parents.

    • Really? Is this really true? The people who pay no federal income tax were pushing for the country to invade Iraq and Afghanistan? And, the people who pay federal income tax were hoping the country didn't invade Iraq and Afghanistan?

      Come on, Keith. CKStevenson is exactly right. We're all Billy — in different ways. We want a large defense budget because there are a lot of people who work in the defense industry – not because we feel that large war ships are necessary. Or, we want a health care bill that covers everyone because we think it's immoral that the only western nation NOT to have a health plan is the United States. We want a bank bailout because we think our 401k plans will improve and we want Medicare because we don't want Grandma to have to work at WalMart when she is 95.

      • Keith is usually pretty fact-based, but this little parable packs all of its conclusions into the premises of the story. Government spending is childish and irresponsible, serves no public purpose, is unconstrained by voters wishes, the expectations of elderly retirees after a lifetime of paying taxes are equivalent to children wanting to joyride in their friends car, etc.

  5. Nice work Keith. I think the political discussion is severely lacking this type of clarity as to what the real issues are.

    I only have one suggestion, and perhaps this is a subject for a separate post: we as the taxpayers (like the parents) don't have a direct say in what congress will spend, but we do have an indirect say. In fact, this is our only way to affect the outcome. If you wanted to extend this analogy in order to make it useful for electoral decision making purposes, you need to figure out a way to make billy have differing fiscal philosophies depending on how the parents feel. Maybe one parent is Dee and one is Randy (trying to be gender ambiguous), and depending on who Billy is listening to/taking advice from/fighting with/got yelled at last by, he feels differently about his fiscal decisions (in my view, high spending and high allowance or high spending and high deficit respectively).

    Then again, maybe this is making this more complex than it needs to be, and defeats the purpose altogether. I appreciate you cutting through the monopoly that the debt v taxes argument has on the discussion though.

  6. Departing from the metaphor. Are you saying that non-income taxes paid by employers and employees do not count? Aren't these taxes contractural arrangements? Even if a person pays no income taxes they are still paying payroll taxes. Doesn't this give them "skin" or are you saying they need to bleed more? Where is thy mercy?

    • Payroll taxes just pay for OASDI and Medicare and don't even pay the full actuarial value of those. Don't lecture me about the deficit and the so-called trust funds and all the rest, I kinow the basic mechanics.

      And, no, just paying some payroll tax (which many people get substantially back through EITC and other "refundable" credits, anyway) does NOT give them skin in the game.

      I will concede, however, that it seems most people just view taxes as a given and so anything they can get out of the government seems cost-free. In that sense, no one believes they have skin in the game because people just don't see a connection between the govt "benefit" they get, and paying for it.

    • So called "payroll" taxes only — in theory — get applied to Social Security and Medicare, so you could make the argument that those not paying federal income tax have some "skin" in those two programs, but certainly not the rest of federal spending. Are these two programs contractual arrangements? No, they are merely taxation in the name of two special welfare programs. I have not signed any contract regarding those programs, nor would I. Social Security is utterly immoral; I have no desire to steal money from my children.

      As for those not paying federal income taxes needing to "bleed" more? Bluntly put, yes, they do. If taxes are to be based on income, then anyone with any income should pay some amount in federal income tax. If a majority of people are not affected by increased federal spending by paying more taxes, then what is to stop the non-payers from continuing to vote for bread and circuses until the system collapses?

      • I don't know about you but I received less in money wages from payroll taxes paid by me and my employer. At the very least that is an implicit contract. On a philosphical level it is part of the social contract. Now, the unified budget was a mistake and the excess contributions should have gone into a fund that purchased equities and bonds just like any pension fund. At least social security would have been more actuarially sound. Medicare is a different question.

  7. Sounds like Billy needs to grow a pair and actually start rationing healthcare. There's a reason medical inflation ins't such a problem in other countries.

  8. I agree with Keith. But this parable is vulnerable because it omits the modern left's sharpest argument: Billy didn't promise to drive his friends around, but to provide them with shelter, nourishment, and money for healthcare bills. It would be argued that Billy's friends are struggling at the moment, and Billy, weighing their plight against his parents' opulence, decides to step in. Further, yes, though Suzy, Mom and Dad would suffer, their situation is still far better than Billy's friends. During the healthcare forum, between Obama/Dems and Republicans, the Republicans brought financials into the room, the Dems brought anecdotes of hardship. Again, I agree with Keith's point, but the parable is too convenient, too mathematical; those on the left aren't looking at the problem this way. Perhaps the parable could be extended or modified to show that the Joneses' own financial situation is in jeopardy, and if it fails none of Billy's promises will be kept.

  9. Nice Parable, unfortunately it’s a little incomplete.

    Billy get’s a great allowance, but his parents make him use it in certain ways.
    Billy doesn’t get to spend his allowance as he sees fit, but rather as the Family has told him.

    Billy’s parents make him pay Nana Jones Rent at the retirement home. That’s a $1000/month. It seems a lot but Nana had an understanding that she had done a lot for the family and that when she got old they would provide for her.

    Nana Jones also sees a doctor once a week and it’s $75/week.

    So that leaves Billy with $200/month in allowance.

    Still a good allowance, but Billy has certain chores.

    One is in the Evening, Billy is supposed to protect the family property. A few years back some nutball threw a molotov cocktail at the house, and now the family wants billy to keep watch at night. Billy needs to get some sleep, so he pays a neighbor $100/month to watch when he’s asleep.

    Then Billy is supposed to work on the garden, the driveway and the sidewalk, he spends $100 buying grass seed, fertilizer,
    cold-patch, etc…

    Then Cousin Bob lost his job and the family has said Billy should give $100/month to
    Bob so he can job hunt and Billy pays $100/month in interest on the credit card.

    That seems a little closer to reality.

  10. The problem with this analogy is why don't Billy's parents simply freeze Billy's credit line? Reading Keith's post is like watching a James Bond movie and wondering why Goldfinger just didn't put a pistol to Mr. Bond's temple and pull it instead of going through an elaborate execution where Bond can escape?

    The solution to the problem is quite simple. If we had a Debt Limit Referendum (seehttp://www.thepeoplesdebt.com for an example), then this "problem" could be solved very quickly. If Congress had to submit any proposal to increase the public debt limit (excluding Social Security and Medicare trust fund obligations) to the voters in a referendum for approval before taking effect, then excessive deficit spending would disappear.

    Of course, that assumes that voters care about deficit spending. I believe that they do, and I believe that they would refuse to raise the public debt limit if Congress did not seriously cut expenditures to entitlements and raise taxes to address the problem.

  11. Hahaha! Myself, I've always wondered why the Robinson family didn't just push Mr. Smith out the airlock.

    The Debt Limit Referendum sounds interesting, but what stops Congress from just raising taxes through the roof and continuing to spend as much as they like? If we end up where a majority of citizens are not paying federal income taxes, what stops such irresponsible spending by members of Congress who will likely still get re-elected?

    • Keith,
      Nothing stops them from doing that right now. How does a Debt Limit Referendum make that a greater risk? A Debt Limit Referendum will force Congress to do things that even a Republican controlled House, Senate, and Presidency could not do — cut entitlement spending.

      Obviously, tax increases will have to be part of that bargain. Democrats won't go along with a Paul Ryan Roadmap of all spending cuts with no tax increases. They'll want the Republicans to offer a pound of flesh. Perhaps a VAT or across the board income tax increases. But Republicans won't agree to tax increases unless and until they know that there are permanent decreases in spending. The Debt Limit Referendum could be their protection to ensure that Democrats cannot renege at a later date. Likewise, Democrats will want to ensure that Republicans won't try to win an election by promising tax cuts that would increase deficit spending.

      The ideologues on both sides will have their wings clipped under a Debt Limit Referendum.

    • Keith,
      Nothing stops them from doing that right now. How does a Debt Limit Referendum make that a greater risk? A Debt Limit Referendum will force Congress to do things that even a Republican controlled House, Senate, and Presidency could not do — cut entitlement spending.

      Obviously, tax increases will have to be part of that bargain. Democrats won't go along with a Paul Ryan Roadmap of all spending cuts with no tax increases. They'll want the Republicans to offer a pound of flesh. Perhaps a VAT or across the board income tax increases. But Republicans won't agree to tax increases unless and until they know that there are permanent decreases in spending. The Debt Limit Referendum could be their protection to ensure that Democrats cannot renege at a later date. Likewise, Democrats will want to ensure that Republicans won't try to win an election by promising tax cuts that would increase deficit spending.

      The ideologues on both sides will have their wings clipped under a Debt Limit Referendum.

  12. The problem with this analogy is why don't Billy's parents simply freeze Billy's credit line? Reading Keith's post is like watching a James Bond movie and wondering why Goldfinger just didn't put a pistol to Mr. Bond's temple and pull it instead of going through an elaborate execution where Bond can escape?

    The solution to the problem is quite simple. If we had a Debt Limit Referendum (seehttp://www.thepeoplesdebt.com for an example), then this "problem" could be solved very quickly. If Congress had to submit any proposal to increase the public debt limit (excluding Social Security and Medicare trust fund obligations) to the voters in a referendum for approval before taking effect, then excessive deficit spending would disappear.

    Of course, that assumes that voters care about deficit spending. I believe that they do, and I believe that they would refuse to raise the public debt limit if Congress did not seriously cut expenditures to entitlements and raise taxes to address the problem.

  13. So, I think that your metaphor is weak. Consider this comment: Billy’s parents realize that Billy’s annual borrowing, his annual deficits and increased credit card debt are not the actual problem to be solved. Billy’s increased borrowing is a symptom of his underlying problem, which is his increased spending.

    Is that really the problem? I mean, I love JCrew. Their clothing fits right on me and looks good on me. If I go to Wal Mart, the clothes look too baggy, shink and fade too quickly.So, I work full time. And, I save some money and invest in things like dividend-paying stocks and growth stocks. And, amazingly, I can afford to go to JCrew and have nice clothes to bring to work.

    Maybe Billy needs to mow some lawns. And, if he doesn't like his lawn mowing job because it doesn't pay enough, maybe he needs to work a second (or different) job.

  14. I think Billy is going to get kicked out of the house next November and will need to get a job at McDonalds.

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