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Fix the Debt

With the big fight behind them, it’s time for the leaders in Washington to sit down and get to work in order to prevent another confrontation in January. Haha! I know, it’s always best to open with a joke, so I hope you liked that one.

Well, if you’re like most people this isn’t a joke at all. The Federal budget deficit is serious business and one of the most pressing problems facing this nation. There are a lot of myths being repeated, however, and many people will be surprised to learn that the deficit was reduced dramatically in 2013. With some growth happening it’s down to just 4% of the economy – from a high of nearly 10% in 2008. But it’s still critical to get a handle on things before the median Baby Boomers start retiring in 2017  if we’re going to realize a new era of growth.

Ready to get serious?

The plastic is maxed.  Time to pay cash.

The plastic is maxed. Time to pay cash.

First of all, we have to conquer the myths about the debt and the deficit (the amount we add to the debt every year). The total debt outstanding is $16.7 Trillion, which is about the same as the total Gross Domestic Product (GDP). However, only 73% of that is held outside of the government (aka the Social Security Trust Fund) and Federal Reserve. These are all big numbers no matter how you look at it, but it could be much worse.

It’s often repeated that Obama “doubled the national Debt”. In reality, budgets passed before he became President total $11.4T of debt and $5.3T were added during this administration. Remember that if you hear this popular myth.

The deficit, or amount we add to it each year, is $642 Billion right now. It’s a lot better than the $1.4T we were adding, but there is room for improvement – and, in fact, it could be eliminated by 2016 without a tremendous amount of pain. That’s if we get serious about it and follow the advice of a fun website called fixthedebt.org.

Erskine Bowles (D) and Alan Simpson (R)

Erskine Bowles (D) and Alan Simpson (R)

This is the public side of the Simpson-Bowles team that hasn’t exactly given up on lobbying Congress for real reform – but they are turning their attention to ordinary people to build support. They even have a handy Excel-based tool where you can design your own budget balancing plan. It’s a handy exercise for understanding a bit more about what the deficit is and how we can reduce it.

Give the progress we’ve made, why bother? Two reasons. For one, it’s a lot easier now than it was in 2009 to balance the budget. But the most important reason is that deficits would start to rise again once Boomers start to retire through the next 10 years if we do nothing. A lot of that comes from rising Medicare costs, but slow growth is currently forecast through that period. Fixing the deficit now is not only easier, it also frees up capital for a new generation that is poised to take over when jobs become available through retirement.

That’s one of the 3 great forces weighing on us right now, and getting this right does make it more likely that we’ll realize a great golden age when the next generation takes over. It’s the least we can do for them given that we’re handing them all this debt in the first place.

The children of Endless Summer aren't doing so well in an Economic Winter

The children of Endless Summer aren’t doing so well in an Economic Winter

But that’s the thing with the debt – we’ve been in a situation like this before. At the end of WWII the total debt was 120% of GDP. How did we get through that? Debt is something that is best handled by balancing the budget (not adding to debt) and then positioning the nation to grow our way out of it, as we did in the 1950s. Everything looks better in a growing economy, and the 2020s will be no different if we do it right.

So, how would you balance the budget? It’s entirely possible that we can eliminate it by 2016, and we definitely should try. While it doesn’t seem likely that Washington will do anything about it, it’s worth noting that for all the fighting in 2013 a lot of progress was made – if clumsily. A little more careful thought could end this year with real solid progress towards setting things up for the next generation.

If you talk to the kids about it, they’ll tell you it’s no joke. It’s best that we all get serious about it, too.

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22 thoughts on “Fix the Debt

  1. I didn’t realize we made that much progress. If that’s the case then all the fighting was worth it if you ask me. You’re right that we should keep at it, we can solve this. There is so much waste especially in the military but you never seem to hear that as a target for cuts. The democrats need to get on that because the republicans never will.

    • You know, you’re right – people need to know that the fighting did produce something of value. I’ve been caught up in the recent fight, which was rather pointless, and that’s not fair. Most of what happened was sequestration – a dumb way to cut, but it happened.
      No one is going after the military, no. The Dems seem to be pretty shy about it, probably because they don’t want to look “soft”. It’s an old problem. But there is a lot that can be cut.
      One old piece i forgot to include in this piece was the solid $500B per year in corporate and stock trade taxes I think we could realize. I would hope that the corporate tax increases came primarily from reform and simplification. https://erikhare.wordpress.com/2012/11/26/taxing-solutions/ I think that is a good way to go for tax increases that should make up at least half of the $642B gap we have to close.
      I could see $320B in corporate and personal tax increases without a lot of real pain and about as much in spending cuts, about $200B of that coming from the military – starting with closing bases in Europe (estimated to be about $80B a year!). In 2 years we could have a balanced budget if we really want to, it’s not that hard.

  2. There’s no reason we can’t have a balanced budget by the end of Obama’s presidency. I’m not a big fan of him but if he could do that he would have something to brag about. Let’s get this done!

  3. when they really vote to make the rich pay their fair share I will believe the balanced budget fairy tales too …..

  4. I don’t know how anyone can make any sense of the budget they use. The accounting methods are from the dark ages and make no sense at all. That would be the first thing that I would fix.

    • Yes, it makes little sense to me. The “continuing resolution” is really more or less how they do everything – it all continues unless someone pulls the funding.

  5. Shouldn’t the debt and deficit be tackled only by raising taxes, since the current level of government services is desired by a majority of Americans?

    If a lower level of government services was desired, Mitt Romney would have been elected.

    • Everyone has their faves. 🙂 It all adds up quickly. The only expenditure I really can’t justify is how much we spend on Defense – at $700B or so it’s a huge number, way out of line. But I still would never say it should be zero.

  6. I don’t understand something. I thought you were in favor of stimulus for the weak economy, not a balanced budget. Can you explain?

    • First of all, the need for stimulus is diminishing as the economy picks up on its own. I believe that by 2017 there will be little need for a stimulus. I am in favor of “tapering” by both the Fed and the US government at this time.
      However, there is also a big difference between balancing the budget with cuts and with tax increases at this point. I do think that cuts in Defense are very much called for, but the rest of the budget can and should be balanced with a restructured tax system – primarily with corporate taxes.
      I do think that keeping bond rates low is a priority, and the best way to do that is to not keep asking for more money. That’s the problem we’re in. Yes, I would still support a lot of spending on infrastructure – but I think it should be paid for by tax increases. And if it takes a lot of pork to get a budget passed so be it – the poorest states right now are in the South and have elected a lot of the Republican leadership (oddly enough). Yes, let’s get them some jobs and repair the infrastructure – but we can pay for it with corporate taxes and not compete in the bond market.
      Does this make sense?

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