Monday, August 13, 2012

US Finances Compared to a Middle Class Family

Now that Romney has chosen Ryan as his running mate, I expect we will begin to see a great deal more news coverage of Mr. Ryan's budget proposal and his emphasis on deficit reduction.  With this news barrage coming, I thought it could be instructive to compare how a middle class family might manage their finances and compare this to how the United States is currently managing its (our) money.

This middle class family is struggling in the current economy and it is complicated by the fact that the  aging mother has had to move to a nursing home.  This family is working to cover the nursing home expenses beyond what her social security check is worth and she does not qualify for Medicaid.  The family has after tax income of $23,020 in 2011, and expenses, including mother, of $36,030.  The family had moved into Mom's old house which is in a good neighborhood but required significant renovations before this family could move in.  So, with the renovations and Mom's 2011 nursing home support rolled into the house financing, they have a mortgage of $101,280 with a pre-renovation value of $151,080.  This yields a monthly payment to the bank of $512 which is 27% of their monthly after tax income.  Looks like a pretty manageable situation, but how long can they continue to roll each years's overspending into their mortgage??

In the table below, you can see the financial picture for 2011 and then the family's best forecast for 2021.


You will see that income is rising a bit faster than expenses since the kids will be going to school and the other parent will begin working part time, close to home.  This family has successfully been able to roll their nursing home expenses into the mortgage and the payments are now a lower percent of their income than it was in 2011.  However, you can see that the mortgage value is approaching 80% of the value of the home, and likely the ability to roll the nursing home expenses into their mortgage will become more difficult.  They need a modified plan sometime soon after 2021.......but that is 10 years away!!  Maybe Mom's situation will change by then and their budget could be balanced!  So lets stay with the plan and update it in about 4 or 5 years.

Now lets take a look and the Federal Budget and resulting debt situation.  In the table below you will see a bit more detail with the year by year situation from the 2013 Federal Budget proposal forecast to 2021.  I think you will quickly see that by taking our family's numbers above and adding 8 zeros, you will have the US numbers in the table.


Included in the Total Expenditures is the interest payment on the debt which is only 10% of what our mock family was paying on their mortgage.  I think the number to keep in mind, which is also the numbers our lenders might be looking at, is Public Debt as % GDP.  In US history, Pubic Debt as % GDP was as high as 105% in 1946, dropped to 56.5% in 1956 and remained below 60% until 2008.  For perspective, here are some other countries 2011 Public Debt as % GDP that have been in the news: Japan, 208%; Greece, 165%; Italy, 120%; Ireland, 107%; Portugal, 103%.  So we are not yet in the danger zone, but if we want to get this ratio back to our 100 year average of 46%, we either need to increase our revenue (put everyone in the household to work) or reduce expenditures (let Mom go!).  No easy choices, but to be clear, our current US revenue levels are only large enough to cover Entitlement Programs which means all the borrowed money is being used to run the Government and the Homeland Security.  Just like any family, setting priorities will be critical, but, unlike our family, these priorities will be dictated by whom the politicians view as the largest voting block.



Saturday, August 11, 2012

Hottest July on Record - Really!

There has been a great deal of "noise" made concerning the average July temperature for 2012 which broke the old record set in 1936.  My first thought about these kinds of statements is that if you have a list of 100 numbers, one of them has to be largest among the 100.  The fact that the highest number in the list occurred in the most recent timeframe, does NOT indicate any statistical significance!  Therefore, I wanted to study these data to understand if there is any statistical significance to July 2012 temperatures.

I went to the NOAA.gov site to retrive the July Average Temperatures by year since 1895.  Indeed, July 2012 was in fact 77.56 Degrees F and outside the Upper Control Limit.  The previous record was in 1936 at 77.43 degrees F which was just inside the UCL.  Here is a X, MR Chart for the entire data set.




Notice the yellow highlighted vertical line which indicates the beginning of a 14 year period where 13 of the 14 years are all above the overall average of 74.402.  This indicates a short term shift in the average.  Beginning 1944, the results return to vary around the overall average and remain consistent at this level until 1998 when another run of 12 out of 15 years again occurs.  Within this statistically different period again the new record year occurs.

This then begs the question: "are these two 14 year periods statistically different from each other which might indicate a warming rise over these 82 years.


In the chart above, each of the two "higher" periods each has its own average and limits.  The first thing to notice is that the 1936 and 2012 temperatures are not outside the Upper Limit and, therefore, not unique.  The more important conclusion is to notice that these two averages are NOT STATISTICALLY DIFFERENT.  This is indicated in the lower left corner of the chart which also states that the year to year variation is not different between the two periods.  In spite of the fact the most recent 15 year period temperature is 0.3 degrees higher than the earlier 14 year period, these two averages are NOT statistically different.  However, rest assured that the media and even some scientists would suggest that this 0.3 degree increase is an indication of "global warming".  The "records" in 1936 or 2012 are NOT UNIQUE.  What needs to be explained is the years 1930 and 1998 when these 14 years periods of higher temperatures began.  Trying to explain what happened in each of the these two 14 year periods would be useful but difficult to connect to a phenomenea of "gradual warming".