Thomas Paine, author of “Common Sense,” writes, “Common sense is the least common thing of all,” especially when it comes to government finances.
In what world does it make sense to dramatically increase expenditures when revenues are unstable and trending down? Not in the real world, but unfortunately, politicians don’t consider real world important. I say this because the one economic factor the government should be monitoring and act quickly on, but doesn’t, is household “quality of life.”
The 164,000 residents of Guam are divided into 44,662 unique households. Some households may have only one person living under the roof, and some may have 12 people or more living under one roof considering the increasing numbers of multi-generation households.
What happens to a household has consequences for the government. But no one in government has made that connection. When household income drops, there is a negative multiplier effect on government finances as households move into survival mode.
When paychecks get smaller because hours are cut, “common sense” kicks in and decisions are made to reduce expenditures. The easiest reductions are discretionary — eating out, entertainment and driving. If household income continues to decline, harder choices are made such as cutting the cable TV, cutting the landline telephone, a near total elimination of eating out, movies and other “outside the house” forms of entertainment. If the household income declines further, the tougher choices begin: fans over air conditioning, eliminating local shopping, shifting vital purchases to online stores, changing cell phone plans, and looking for a cheaper place to rent. When the struggle to survive gets harder, bills start getting juggled as households determine how long certain bills can go unpaid before bad things happen such as utilities getting disconnected, cars getting repossessed or getting evicted.
At this stage, most households start looking for third or fourth jobs, selling assets, applying for welfare, or moving to a place with more opportunities and a better quality of life.
Many households lack financial stability. As documented by the Federal Reserve Board, 40 percent of households in the United States cannot deal with a $400 emergency with existing resources. A survey on Guam documented that 62 percent of households aren’t capable of dealing with a $400 emergency with existing resources.
The biggest difference between the way a household heads and politicians react to income declines displays politician’s “lack of common sense.” Politicians act differently because they have no skin in the game. It is very easy spend money not coming out of their personal accounts. They never feel the sense of urgency a household head feels when spending money.
Lacking a sense of urgency is a problem multiplier in and of itself, because it blinds them to real world problem solving processes heads of households are forced to engage on a daily basis.
The very real problem for the government is that as a household’s income drops, the withholding tax collections drop. As a household’s purchasing drops, BPT taxes collected from businesses drop. As more purchases are shifted to the internet no taxes are collected and the government loses the positive multiplier effect of money spent in the local economy. As government revenues decline, do we see any signs of common sense in any of our politicians? No.
In the artificial world of government employment, it is very easy for politicians and government executives to talk about raising fees and taxes because their incomes are guaranteed. They get 40 hours or more a week, but never less. They never worry about a shortage of customers or the business closing resulting in job losses. It’s a whole lot different out in the real world.
By way of example: the governor has embarked on a series of pay raises to make GovGuam executives among the highest paid people on the island. Despite uncertain revenue forecasts, the government continues to expand operations and headcounts, while taking unnecessary trips and making unnecessary purchases.
In an effort to bridge the gap between declining revenues and rising operational expenditures, politicians seek to raise all government fees and add new taxes. The major problem with their plan is the inconvenient truth that Guam still has a small and poorly compensated workforce, and any fee or tax increases will be offset by losses of BPT collections as household cut purchases to concentrate spending on food, shelter and utilities.
Over the past four years the cost of living has gone up over 30 percent, and wages have remained the same, reducing the households’ buying power. I am a senior citizen living on a fixed income. As the cost of living goes up, my taxable spend in support of local businesses goes down. My utility bills account for 34 percent of my income, and as utility rates go up, my disposable income goes down. The bad part for GovGuam is utilities don’t pay taxes.
When the gas tax increase hit, I cut my travel to town from daily to twice a week. With that travel cut, I no longer eat lunch in town five days a week. Instead of movies two or three times a week, we watch movies online.
As local prices go up, I buy more over the internet, which deprives local businesses of sales, the government of BPT collections, withholding taxes on employees who work in those businesses, and income taxes as both businesses and employees report lower earnings. Every increase in government taxes or fees will reduce a household’s local spend adding more speed to the downward spiral of the local economy.
Referring back to the fact that “common sense is the least common thing of all,” you’d think politicians learned a lesson the last time minimum wage was raised. Jobs went up. Tax collections went up. The economy grew from $4.8 billion to $5.1 billion. And the number of people on food stamps went down for the first time in Guam’s history. That increase was five years ago, and since then, all the positive effects of the minimum wage increase have been eliminated by a cost of living that has gone up over 30 percent.
If politicians are serious about improving the financial stability of the government, they need to focus their efforts of improving the finances and quality of life of the households first.
It’s the common sense thing to do.
Ken Leon-Guerrero is the spokesperson of Guam Citizens for Public Accountability. Send feedback to firstname.lastname@example.org