Saturday, December 11, 2010

Our Math Problem

Jeb HensarlingImage via Wikipedia
Our leaders, our political pundits (sadly including many of our conservative talk show hosts) and most especially members of Congress seem to have difficulty with math - and we have a major math problem.

While the focus is on the deficit - and that certainly is important - what really matters is the total debt. Let's look at the important numbers. The Federal Reserve yesterday released U.S. Household Net Worth. The sum of all the assets of all the household in the U.S., less the credit card, mortgage, auto loan, etc. debt is about $55.9 trillion. Since stocks and bonds are ultimately owned by individuals, that represents all the companies, certificates of deposits, houses, land, gold, jewelry, timber, automobiles, guns, baseball card collections, art, oil wells, farms, ranches, camp grounds, office towers, apartment buildings, malls, pensions, boats and motorcycles in the country.

On the other hand, the accumulated U. S. debt is $13,800,000,000,000. That is $13.8 trillion, but I think showing the string of zeroes illustrates the size of the math problem better. (See for a scary view.) Or, just under 25% of all American assets would be required to pay off the debt.

The U.S. government budget for fiscal year 2011 estimates receipts of $2,567,000,000,000 and spending of $3,834,000,000,000, or a $1.3 trillion deficit. Let's be optimistic and make the following assumptions: first, government receipts grow four percent a year every year. And second, we end the wars in Afghanistan and Iraq, saving $200 billion a year, and we cut another $200 billion from spending. Further, we freeze every cost. That is, no raises to the military, no Social Security increases, no additional Medicare costs, and so on, or, that any such increases are offset by cuts somewhere else. As a result the 2012 deficit would be $833 billion (accumulated debt rises to $14,600,000,000,000). Costs would have to be frozen for 11 years, and revenue compound at four percent per year, to get to the first balanced year. If expenses grow at 2%, it takes 15 years to get to a balanced budget. Oh, and by the way, during that eleven years, another $6,600,000,000,000 is added to the debt before we get to that balanced budget.

I'd like to find a solution to the math problem that doesn't involve higher taxes, but I don't think that is math, it is magic, or worse, fraud. And if our elected officials have actually looked at the math, but tell us there is another way out, they are either lying hypocrites, or they need to tell us how it is going to work.

I listen to the attacks on the commission that was charged with proposing a solution and I am in turn shocked and disappointed. I watched Newt Gingrich - whom I admire- totally reject their recommendations because, in his view, they aren't sufficiently pro-growth. Newt - do you really think we are going to grow our way to a $500 billion surplus per year, for 28 consecutive years, to pay off the debt?

I watched TX Congressman Jeb Hensarling categorically reject the commission because it didn't deal with ObamaCare. Well, Congressman, there already is a $14 trillion hole to fill before that, so your position seems disingenuous to me. Or, perhaps you've been teaching your children to read, write and speak Chinese, since that is who they will soon be working for, therefore they're prepared and you really don't have to worry about it.

Annual after tax income from all households is now $11.4 trillion per year. The national debt represents 120% of national after tax income (at current tax rates).

The Commission's proposal to deal with the problem with a mix of two-thirds spending cuts and one-third revenue increases seems logical to me. I was pleased with Rush Limbaugh's initial response, which was pragmatic enough to recognize that this doesn't get resolved without some pain. If anything Mr. Limbaugh is a successful businessman, and can run the numbers.

To those that say raising taxes in a recession is a bad idea, I say yes, that is true, but leaving my baby granddaughter a bill for $14 trillion plus is equally a bad idea. And gradually making Americans indentured servants to the Chinese via getting them to keep buying our debt, is the worst idea of all.

One way out is inflation. By running the inflation rate up, government receipts don't grow four percent, but ten or twelve percent, and the debt gets paid with devalued dollars. The gold and silver markets are certainly signaling concern that is indeed what will happen. There is also the banana republic way out: the country simply declares its inability to pay and stops paying. That generally has a calamitous impact on the population; nonetheless it has been done numerous times.

The third path is the path of math and hard decisions: cut spending, raise taxes, reduce regulations and increase growth. The goal must be that everyone feels a little skinned. The Congressional pet projects get eliminated, the military, Social Security and Medicaid programs get cut, taxes get higher, in my ideal world some government departments and agencies get eliminated in their entirety, and major changes are made in the regulatory regimes.

OK Congress, time to get your calculators out. The good news for you is that this isn't a polynomial problem, a quadratic equation, and definitely not calculus. It is arithmetic with a little compound interest calculation. Time to do your homework assignment and come in with your math problem worked.

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