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Chapter 9 Our National debt and deficit.
“We must not let our rulers load us with perpetual debt.” Thomas Jefferson , letter to Samuel Kercheval, July 12, 1816
At the time of this writing (Dec 16th, 2010), the U.S National debt is approximately 14 trillion dollars according to the debt clock. This amounts to about $45,000 per citizen. These are staggering numbers, and from my conversations with many people I know there is a great deal of concern about the debt.
The debt is a little different from the deficit , which is a measure of revenues minus expenses. I look at this, I’m sure somewhat simplistically, in terms of ordinary budgets. If my wife and I bring in X number of dollars and spend Y number of dollars, our deficit (or surplus if the number is positive ) is X-Y. So it looks like our country brings in X number of dollars as tax revenues from all the citizens and spends Y number of dollars. Y exceeds X, so we are running deficits most years. During the Clinton years, I believe there were some budget surpluses, so X exceeded Y. Although that’s a great feat given all the money our Congress wants to spend, it does not help with the debt.
This situation scares the heck out of me. To me it resembles a hypothetical personal financial situation where my wife and I were both spending $10,000 per month, while bringing in say only $8000 per month. So every month we run -$2000.00. On top of this, however, we both have a credit card debt of say $45,000. And we just keep borrowing to cover our shortfall. This hypothetical would put me pretty well into a panic. That’s why I think the long term financial health of our country is in grave jeopardy.
There is a connection between the deficit and the debt. I hope I’m not looking at this too simplistically, but if we add up all the deficits incurred over all the years the government has been there, and we subtract the surpluses for the odd years here and there, that should give us our national debt.
How do we get out of this situation? What I see is politicians bickering every time there’s an election cycle, and running up deficits and not really even addressing the debt issue. Going back to my hypothetical, how would we dig ourselves out of the deficit, and address the debt situation at the same time?
I don’t think there’s any magic on how to reduce the deficit, it’s fairly obvious. You have to either cut spending, increase revenues or do both simultaneously. With the amount of political bickering going on, it’s hard to see how this is going to happen, but something has to give. Taxes will have to go up to increase the revenues and both parties will have to abandon their sacred cows and cut spending. How to do this humanely so that you don’t impact the aging and vulnerable population (like the older folks), is a difficult problem. I don’t have any fresh ideas there. Cutting defence spending for horribly large weapons systems seems feasible to me. At the same time, I would invest a lot more in terms of beefing up the number of people in the armed forces. I think it’s really important to have a large standing army, but not really important to have multibillion dollar weapons systems. These will all be hotly contested debates, and I’m not sure how we will get to the bottom of the deficit reduction equation. Probably a combination of some taxation and cuts that will all be unpopular for some segment of society (if not all).
However, I think there is scope to address the debt in a very systematic manner. Going back to the hypothetical, if my wife and I had $45,000 in credit card debt, I would do one of those automatic payments where you deduct a certain amount out of the monthly revenue and apply it to the principal. I think that’s what we need to do with the national debt. Regardless of which party is in charge, we should just take all of our national revenues from taxation and automatically apply say 10% to reducing the debt. This should be an automatically implemented action so one political party or the other can’t screw the system up. Congress and the President should have no choice. If I’m paying say $20,000 in taxes every year to Uncle Sam, $2000 of it would go directly to reducing the $45,000 portion of my national debt. If 10% is too high because it would gut the running budget too much, then a lower percentage should be tried, say 5%. Whatever percentage we apply will be better than the current percentage, which is zero. If I pay $2000 per year, it would still take in the neighborhood of 25 years to shave the principal off my $45,000 debt, but at least it is a start. As an example, in FY 2009, Uncle Sam collected $2.1 trillion in tax revenue. 10% would be 210 billion dollars. Paying 210 billion dollars from the principal of 14 trillion dollars would represent paying down 1.5% of the debt. It’s not much, but in 10 years we will have paid down 15% of the national debt without too much political furor. 210 billion dollars sound like a lot, but I think we can try and shave that much off the current budget if we are judicious. As I said, if it’s real difficult to shave off that much without a lot of social pain , then target 5% , which would be a 105 billion dollars, and then ramp up the percentage gradually. The key point is that the automatic nature of the deduction and the pay down prevents political tampering with the budgetary principle. The plan will gain more momentum and popularity as the years pass, because the more you reduce the principal, the easier it will be to make interest payments as well. Whichever political party is in charge can claim credit for its success, a situation which is always conducive to encourage politicians to actually do something.
This would also of course force the revenue side downward, but I don’t see that as a bad thing. The pressure to manage the deficit on a year to year basis will always be there, no matter what. Especially with all the pet projects and sacred cows everyone has, with lobbyists working hard to maintain status quo, the deficits will continue to be there until we make some fundamental change. We can’t scrap plans to reduce the debt just because we are afraid of the deficit. I for one would sleep much easier knowing that I’m chipping away at the $45,000 portion of my national debt contribution. If we just keep running a deficit or even manage a balanced budget but fail to tackle the debt, I don’t see how we ever eliminate the debt.
Reducing the revenue would actually have a positive effect. It would force the government to look at spending cuts and tax increases in a very serious manner even in the short run. That would, in turn, potentially lead to elimination of the deficits. By sending the clear message that reduction in debt requires major sacrifices, by chipping away at the national debt every year via a portion of revenues, we send the right symbolic message to everyone- including Congress and the President.
I think this type of proposition could gain favor among both parties, because the impact to the citizen is not immediate. You could have a phase in plan so that the impact to revenues is not a major shock. Use an automatic 2% deduction the first year, then make it 4% the second year and work your way up to 10%. Or if 10% is just too high because the number crunchers think it will gut the running budget too much, and then pick a suitable value X after the detailed calculations. Say X turns out to be 8%. Then phase in the plan and work your way up to 8%. You can try different rates of increase as well if that’s easier. The only variables to set are the ultimate amount to aim for (which I think intuitively will be in the 8-10% range), and the slope of the increase. There’s no difference in the taxes you will be paying. So it’s easy to sell politically. To the average citizen, it just looks like some money shuffling at the government revenue side, and not an immediate increase in taxes or a major cut in spending. Regardless of your political leanings, pet projects, or sacred cows, almost everyone agrees on the need to trim the national debt in a systematic way. I think this sort of national “auto-deduction from the bank” scheme has a chance of success. Basically, it sets repaying part of the debt as a national priority regardless of which party is in charge.
Instead of the political stunt of a balanced budget amendment to the Constitution, they should add an amendment saying that paying a portion of the principal on the national debt is mandatory. The “auto payment of national debt principal” amendment would forcibly engage politicians to address our catastrophic debt situation. It would also prevent future generations of politicians from dipping into the credit till without any concern for the financial wellbeing of our country. The international community would have renewed faith that our government is serious about eliminating the debt, and would respond positively.
Discuss and enjoy!
Notes to the 3rd Edition for Chapter 9
The U.S debt clock has an extremely useful information at this site : http://www.usdebtclock.org/
The current debt load (on April 20, 2012) is about 15.68 trillion dollars or about $50,000 per citizen. Discussions on reduction of the debt are mired in partisan politics. In my opinion, this type of escalation and deadlock just demonstrates that an autopayment scheme is a desirable path to the solution.