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Jeffrey Sachs, Charles Dickens, and our National Budget Debate

Submitted by Ken Watts on Wed, 11/23/2011 - 15:52

Our current national budget debate reminds me of a quote from Charles Dickens in David Copperfield:

Annual income twenty pounds, annual expenditure nineteen six,
result happiness.
Annual income twenty pounds, annual expenditure twenty pound ought and six,
result misery.

Jeffrey Sachs posted a fascinating piece in The Huffington Post Sunday, in which he applied a "misery index" to the economies of the U.S., Canada, and Western Europe.

He was kind enough to also post his data, so I downloaded it, and created the following chart:

Sach's "Misery Index" is the sum of the unemployment rate, the budget deficit, and current account deficit (broadly meaning more imports than exports) of each country—represented by the black diamonds on the chart.

So, for example, Ireland, on the far left, has a Misery Index of 46.8, while Norway, on the far right, has a Misery Index of -19.9.

The blue squares represent each country's revenue (mostly from taxes), and the red diamonds represent each country's spending (each as a percent of GDP).

So Ireland, with a very low revenue and the highest spending of the group, also has the highest Misery Index.

Norway, with the highest revenue and low spending, has the lowest Misery Index.

I've added trend lines to make the basic point of the chart clear: in general the higher a country's taxes are and the lower the country's spending is the less misery the country's citizens endure. On the other hand, lower taxes and more spending lead to greater misery.

To paraphrase Dickens:

Taxes twenty pounds, spending nineteen pounds,
result happiness.
Taxes nineteen pounds, spending twenty,
result misery.

So where does the United States fit in this scenario?

The USA ranks just fifth highest on the Misery Index, so we obviously need to cut spending, or raise taxes, or both.

But if we compare our spending and taxes to the other countries on the chart, they are both extremely low.

Only two countries (Switzerland and Luxemburg) spend less than we do—we spend 4% less than Norway, which has the lowest Misery Index.

On the other hand, our revenue is the lowest on the chart.

Which, if you think about it, provides a kind of common sense solution to our national debate.

Suppose you are stuck in a Dickensian misery—bringing in 20 pounds a year and paying out 21, and you are trying to decide where the problem lies: should you be cutting expenses, making more money, or both?

You survey the other households in your neighborhood, and find that some of your neighbors have a similar problem, but some are doing quite well.

But you also discover that your expenses and your income are both among the lowest on your block.

Do you concentrate on cutting your expenses even further—do you think it is likely that living on less will make your Misery Index better or worse?

Or do you concentrate on increasing your income?

Overspending can definitely be a problem, but if you find that your spending is lower than almost everybody elses it's probably not your problem.

At least, that's what I think today.