To raise the Debt Ceiling, or not. To raise taxes, or not. To lower taxes, or not. And while all of this debate is going on, the rest of the world is looking at us, wondering if we have any idea whatsoever what we’re doing. I must admit, I’m starting to wonder myself. I’m pretty sure my Congressman is getting tired of seeing my name pop up in his Inbox. That’s okay, he’ll get over it. Besides, he works for me so he’ll just have to deal with it. But, I digress… Let’s take a look at a few financial realities and see if we can leave our politics at the door long enough to bring a little common sense into the discussion.
The Debt Ceiling is being made into something, the outcome of which, will determine whether or not we fall into a Financial Armageddon. Is it? Not really. Okay, a little. Well, it’s a little of both, actually. The truth is, the debt ceiling itself will not directly cause a financial crisis, but it will have an indirect effect.
Despite what is being reported in the Media, the world will not come to a crashing end if we don’t raise the limit on the Nation’s credit card. Not raising the debt ceiling does not mean that we will all of a sudden not be able to pay our bills. What it does mean is that we won’t be able to borrow more money to do it. We are currently running a huge deficit (about $1.65 Trillion this year), but that doesn’t mean that we don’t have any income.
The Federal Government takes in about $200 Billion per month, so we can still pay our interest payments on our debt, which total about $29 Billion per month. We can still pay our Soldiers, at a cost of about $3 Billion per month. And yes, President Obama, despite your extraordinary display of leadership in saying that Social Security checks won’t go out, that is simply not true, as we will have plenty left over to still pay that $49 Billion per month tab. The fact is, we will have to prioritize because we won’t be able to pay everything, but the only way that Seniors and Soldiers won’t get their checks is if President Obama chooses to not send them. Mr. President, you should be ashamed of yourself. Trying to scare old people is just not nice.
Once you factor in Medicare/Medicaid, that leaves us with somewhere in the ballpark of $40 Billion per month to pay for everything else. It’s pretty safe to say that we’re going to come up a bit short. Let’s be honest though, do we really think that the world as we know it will end if the NEA, NPR, HUD or any other alphabet-soup acronym department doesn’t get their money (well, doesn’t get your money, to be precise)? I’m going to go out on a limb and say it will not.
Will we have to raise the debt ceiling at some point? Yes. It must be done eventually, because our deficit is way too large to balance quickly without massive European-style austerity measures. Big government worked pretty well over there, didn’t it?. If you’re still not sure, just ask any of the tens of thousands of folks rioting in the streets because their “free stuff” is getting cut.
The only way to keep paying the bills without those types of cuts would be for the Fed to start printing money again, which would do wonders for the strength of the dollar, the prices of food, transportation, consumer goods, oh, and let’s not forget, oil. Don’t worry though, you don’t use any of those things, right? That’s good, because Bernanke is already hinting at QE3.
The thing is, ultimately, we will have to raise the Debt Ceiling, but we have to do it responsibly. And no, responsibly does not mean raising taxes. Today, Moody’s placed U.S. debt on review for a downgrade, but it’s not because our plan is bad. It’s because we don’t have a plan.
The Administration, while refusing to offer up any spending cuts, is insisting on tax increases. Yeah, that’s a good plan in a bad economy. Take more money out of the pockets of taxpayers. Brilliant.
Newsflash: Consumer spending drives the economy. Raising taxes on anyone reduces the amount they have to spend, meaning they will spend less, businesses will lose revenues, create fewer jobs, and the cycle continues. And the truth is, we have a spending problem, not a revenue problem. I know that sounds like a talking point, but if you don’t believe me, just look at the chart below.
The chart clearly shows that our spending, while more than we bring in, hasn’t actually been that excessive until the last three years. But the last three years are very clear and show that with revenue dropping, spending went through the roof and I’m going to go out on a limb again and suggest that most of us probably don’t feel that we’re any better off for it. We need to cut our spending drastically and immediately. That is where the heart of our problem is. Government spending does not drive the economy. It can give a small, short term boost, but it does so at the cost of everyone who pays taxes. And once again, are you better off after $1 Trillion in stimulus spending?
Tax increases are not going help either. Oh, but it’s only fair… the rich don’t pay enough and they’re rich already, so they won’t be hurt by it, right? A), Bullshit. And B), it wouldn’t help anyway. It’s just a way for Politicians to stir up some class warfare with the common folk to get their support and to continue to be able to buy their votes. If you think the rich don’t pay enough already, then you’re getting played. The hard facts are that we could double everybody’s income taxes and it still wouldn’t close the deficit.
Here’s another apparently little known fact: Tax increases never bring in the amount of money that they project. Why? Simple economics. Making any activity (in this case, earning money) more expensive results in less of that activity. Did Walmart become the largest retailer in the world by raising their prices? I think not.
When President Clinton convinced Congress to pass his tax increase package, the net result was only 60% of the projected revenues ever materialized, and that was in a booming economy when we were riding the wave of the dot-com boom. In addition, a significant portion of the revenue increase came from Capital Gains, which were actually lowered, not raised.
When President Bush took office, the dot-com bubble had just burst and the country was sliding towards a recession. Congress enacted his tax cuts, revenues dipped at first, then increased dramatically. The end result over 5 years was a 39% increase in income tax revenues, accomplished by lowering taxes, not raising them.
Look at the chart again if you don’t believe me. Or go to IRS.gov and look it up yourself.
Is raising taxes the answer? Absolutely not. Is lowering taxes the answer? No, not that either. Here’s where we get to the simple part
1) Cut Federal spending by 10% across the board, with a 5 year freeze on spending. I don’t mean a reduction in increases by the way, I mean real cuts. Don’t play politics and try to cherry pick specific programs, just cut the departmental budgets by 10% and let the directors figure it out. That’s their job, after all, isn’t it?
2) Raise the debt ceiling if necessary, but by no more than an equal dollar amount of the cuts achieved.
3) Start reforming the tax code by broadening the base. Eliminate a large amount of the deductions and credits, while lowering the marginal rates accordingly to keep it revenue neutral. Right now, we can’t afford to make drastic changes, but we need to get to a point where people can keep more of their hard earned money if we want our economy to regain any kind of strength. Governments don’t drive economies, Consumers do. Governments just get in the way and spend our money.
4) We need a Balanced Budget Amendment. It’s time to stop talking about it and get it done.
When it’s all said and done, our representatives in Washington D.C. need to put on their big-boy pants and do their jobs. They need to focus on financial realities, not on ideology, especially when facts don’t support that ideology. You can’t argue with numbers, and the numbers show that we can’t keep spending the way we have been. The Federal Government needs to do what the rest of us do when things are tight, skip dinner and a movie and go with a DVD and Mac & Cheese.
Photo by Kevin Krejci