I heard there had been riots in Greece. People in Greece rioted because the Greek government cut public sector employees’ wages. The government cut their wages because it paid the employees too much in previous years. The European Union requires its members to keep the budget deficit to 3% but Greece was running 13% deficit and lied about it to the EU so it could pay the wages it couldn’t afford.
Instead of being content about having had some unusually good years, people are mad about being asked to go back to normal because they got used to the good times. Rioters threw fire bombs into a bank. Three poor bank employees who had nothing to do with the wage cuts died of inhaling smoke. How sad.
Lesson learned: don’t get used to the good life. It’s much harder to cut back than to spend the extra money. At the individual level, how do we make sure we are able to deal with an income reduction so we don’t riot in the streets?
Saving money when times are good is too obvious. I won’t bore you with that.
Maintaining a flexible budget would be another way to deal with potential income reductions. I’m very wary of buying anything that requires an ongoing payment. Once you sign up for an ongoing payment, it becomes part of your budget. You keep paying and don’t think much of it. Any cutback will be perceived as giving up something that you got used to.
That’s why I don’t have an iPhone, even though the other day I saw the grocery store cashier has one. If I have the money, I’m OK with spending it on a one-time purchase. I bought a 52-inch LCD TV and a Blu-ray player last Christmas. I enjoy them. They are not that expensive. After Bing Cashback, I paid about $900 for both. They are much less expensive than an iPhone.
When you have a flexible budget, a 20% income reduction doesn’t affect your basic lifestyle. You naturally hold back the one-time purchases you used to make but your basics are still covered. When your basics are still covered, there’s no reason to go rioting in the streets.
Governments don’t seem to understand this concept of budget flexibility. When times are good, they create new programs that require ongoing funding. The programs are no doubt worthwhile, just like an iPhone is nice. Once created, people get used to these programs. When good times pass, cutting back on the programs becomes so much harder.
Lately I received many flyers in the mail about protecting such and such programs against the dire consequence of budget cuts. I wonder if the so called cuts are only compared to the good times. I also wonder if such programs would have been created if we didn’t have a real estate bubble which flooded the government with extra money.
The same goes for tax cuts. It’s clear to me that the Bush tax cuts weren’t sustainable when they were enacted. However, once people get used to them, they become the norm. Even Obama is afraid of sunsetting the Bush tax cuts as scheduled. What a disaster. If the Bush tax cuts were bad, let’s do the right thing and not continue them.
You see how good times can do so much damage?