In defense of austerity

(MoneyWatch) COMMENTARY A capitalist and a socialist walk into a bar. The capitalist says, "Give me a beer, put it on my tab." The socialist says, "I'll have what he's having, put it on his tab."

No, I don't think that's particularly funny either. But then, I'm no comedian.

Still, as metaphors go, it's not bad.

You see, just about everyone in the western world has a pretty big tab going. The only difference is the socialist just assumes someone else is going to pay for his.

The problem is that, sooner or later, the capitalist gets sick and tired of paying double for his drink and goes looking for someone else's tab to put it on.

Eventually, the bartender, who just happens to be Chinese, owns them all and, realizing he's never going to get paid, cuts them off.

And that brings us to the old Margaret Thatcher line, "The problem with socialism is that eventually you run out of other people's money."

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Finance is such a simple matter it's hard to believe all the heated debate over austerity measures in Europe and deficit spending here in the colonies. Yes, I know people cling to their ideals but there's really nothing idealistic about finance. In fact, it's so simple even a child can understand it.

And what do you tell children when you want them to understand finance? That money doesn't grow on trees. In reality, it's not much more complicated than that.

Deficit spending for dummies
The basic fundamentals of deficit spending are the same regardless of the size or type of organization. They're the same for individuals, families, companies and nations.

There's income, expenses and debt. If your income doesn't cover your expenses, you borrow to cover it and pay interest on the debt. Too much of that and you're in trouble. You become insolvent. You default on your loans. Your credit goes to crap. You go bankrupt.

Sure, there may be different line items on the income statement and balance sheet for a nation versus a company, but when it comes to running and funding an organization, income and expenses, debt and solvency - it's still the same basic concept.

And the simple fact is this: you can't live perpetually beyond your means. You just can't.

Now, you know as well as I do that people will throw all sorts of variables into the mix to try to complicate things. They'll say we have to take care of our poor people and elderly. We have to fund our defense and military. We need good schools to educate our children. We have to pay for roads and other infrastructure. We've got all those lawmakers and department administrators to fund. And so on.

They'll say that companies and governments aren't the same, that you can't compare the two. Well, they're wrong. They are the same. You absolutely can compare the two, at least in a capitalist system. Just watch me:

Governments are just like companies -- who knew?
All organizations have revenue, regardless of its source. Revenues can be from an individual's job, from a company's products or services, from a non-profit's benefactors, or in the case of governments, from taxes.

Governments have entitlement spending. Likewise, families have to pay for health care. And most companies share the health care burden, plus they have to pay for all sorts of other benefits for employees.

Families have to educate their children. Are you going to tell me that $50K a year for a private university isn't an education expense? And companies have to train their employees, as well. Same thing.

Governments have administration and infrastructure expense. So do companies. It's called G&A or general and administrative expense. And families have to pay for housing, food, phone and internet service, utilities, you name it.

And while governments do play a role in creating an environment for corporations, small businesses, and individuals to thrive, there are companies that do the same thing. Walmart, Cisco, and Intel, to name a few. For every way you think governments are different than families or companies, I can show you that, when it comes to finance, they're really not.

If it's all really that simple, then why do people make it sound so confusing and complicated? If all these organizations are just financial ecosystems of varying sizes, if they're really all similar, then why do so many people think they're not? Don't they realize that money doesn't grow on trees? Don't they get it?

Why don't people get it?
Wouldn't you know it, the answer to that is pretty simple too. First of all, on some level, they get it. Everybody does. Nobody thinks money grows on trees or that you can sustain a financial ecosystem indefinitely with deficit spending. That's just silly.

Um, wait a second. That's actually not true. There is one general class of people that doesn't think that way at all. Children. Until they're taught otherwise, little children think money grows on trees; that all good things come from mommy and daddy and there are no consequences to their actions.

And when people compartmentalize simple, obvious facts and make believe they're not true, it's because they don't want to believe they're true. They want to live in a Utopian, make-believe world, just like children do. They want mommy and daddy to tuck them in, kiss them, and tell them everything's going to be fine because mommy and daddy will take care of everything.

In the adult world, we call that a nanny state. And when an individual or an organization of any size lives beyond its means for too long and doesn't want to face the music when the time comes, I don't care if it's the U.S., France, Enron, Kodak, the Lohans or Michael Jackson, it's childish. And yes, it really is that simple.

Image courtesy of Flickr user kenteegardin