Solving Debt Problem

We are facing a “fiscal cliff” because our politicians, President Obama and Congress, did not solve our debt problem in 2011 and pushed it off until the end of this year. They did this by agreeing to spending cuts that were deemed to be unacceptable by all parties. The logic, or lack thereof, was after the 2012 Presidential election both parties would be forced to reach a compromise in order to avoid such drastic measures. They put a gun to their own head. This is not a way for the government of the largest economy in the world to operate and we should be mad as hell.

Below is a quote from the Congressional Budget Office (CBO) that describes the current budgetary problem facing the country if we do nothing, including not enacting the above mentioned fiscal cliff agreement.

“… the persistence of large budget deficits and rapidly escalating federal debt would hinder national saving and investment, thus reducing GDP and income relative to the levels that would occur with smaller deficits. In the later part of the projection period (2022), the economy would grow more slowly … and interest rates would be higher. Ultimately, the policies… would lead to a level of federal debt that would be unsustainable from both a budgetary and an economic perspective.”

There are two parts of our nations budget that cannot be ignored if we truly expect to get a handle on our fiscal problems; defense and entitlements.

Per the Peter G. Peterson Foundation, 

“We currently spend more on defense than the next 13 countries combined. Defense spending accounts for about 20 percent of all federal spending — nearly as much as Social Security, or the combined spending for Medicare and Medicaid. The sheer size of the defense budget — $680 billion in the current fiscal year — suggests that it should be part of any serious effort to address America’s long-term fiscal challenges.”

The defense budget for China, the country with the next largest budget, is a little over 20% of ours. Our nation cannot do everything that it desires. We must ration our resources. Below is a chart showing how our government spends its dollars. We need to decide how to rearrange our priorities.

Our future depends as much on education as it does defense. We need to improve the knowledge level of our citizens or we continue to decline in power and influence. For the defense of our countries position in the world, we need to reduce our budget for defense and transfer much of that reduction to education, research, development and infrastructure. We no longer can be the military of the West.

With limited resources we must collectively decide how much are we willing to help our less fortunate citizens. Further, what demands should we place on those who are less fortunate to help themselves dig out of poverty? Everyone agrees that each individual should provide for themselves whenever possible. The debate is going to center around “whenever possible”.

We cannot agree on a plan to solve these problems by December 31, 2012. Therefore, we should extend the payroll tax extension, eliminate the Bush tax cuts for the top 2%, implement expense cuts that can be agreed on and set a new date to address the bigger problems by March 31, 2013.

National Budgeting 101

One expenditure in our budget cannot be looked at in a vacuum. The truth is this country needs to get a handle on its spending. Yes, we need to look at ways to generate revenue including trying to jump start the economy with a targeted stimulus package; however, we also need to gain control of the governments spending habits.

In order to do this on a rational basis, we need to look at total spending and prioritize expenditures. If we only look at each line item of expenditures separably, without considering the total revenues available, we will never get our budget in balance. A good example is how we went to war in Iraq. When President Bush led us to war, there was no discussion as to how much it was going to cost and how we were going to pay for it. In fact our President encouraged us citizens to not change the way we were living, including our shopping habits. He made the case if Americans changed their live style as a result of 911 and the Iraq war the enemy would have already won. He encouraged Middle America to continue buying ice cream from Cold Stone.

This is a primary reason why our budget is out of control. The nation starts to spend before determining how it is going to pay for it.

When a household reviews its budget it first identifies the amount of total funds it has to spend. After that, it determines what it needs and wants to spend. It first determines the necessities; food, clothing and shelter. It then ascertains the revenues that it has remaining and decides how the rest of the revenue will be spent.

Medicare may end up to be a high priority; however, first we must put it into the context of the revenues available and the importance of medicare relative to the other expenditures that this country deems to be worthwhile.

This is basic budgeting 101.