What If Uncle Sam Were In Charge Of Your Household Finances?
I think most of us have some vague notion that the U.S. Government is in debt. The numbers involved are so big that it is almost impossible to fathom how serious the problem is. And so politicians continue pontificate to a disinterested audience.
Democrats contend that the best way to get rid of the debt is to close tax loopholes and increase taxes on the wealthiest Americans.
Republicans argue for reducing the tax rate and regulations to get the government off the collective back of corporate America and small businesses owners. The unshackled companies would supposedly be free to grow, which will create jobs, which will result in higher tax revenue. As an aside, the GOP is also amenable to saving a few billion here or there by eliminating some discretionary spending.
The truth of the matter is that neither approach will work.
In order to grasp the situation, let’s put the debt in terms of something we can understand- household finances.
The 2017 federal budget will be nearly $4,000,000,000,000 (that’s $4 Trillion). It will be dominated by 4 items (using 2015 breakdown):
- Social Security & Unemployment: 36%
- Medicare & Health: 28%
- Defense: 15%
- Interest Payments: 6%
Now let’s convert those figures to an equivalent for the average American family.
The median American household income is $56,000. The effective tax rate (for a joint filling with 2 kids) at that income level is 13%. Therefore, the resulting median net disposable income is $48,720. Thus, in our model the government’s $3.25T tax revenue is analogous to the median family’s $48,720 disposable income.
Likewise, the government’s $19.8T debt would be equal to $344,377 of credit card debt for this family.
And now, let’s assume that Uncle Sam would prepare the household budget in the same proportions he uses for the federal budget.
Notice the annual savings is minus $2,197. It’s not very encouraging given that family’s lifetime savings is $2,849 (equivalent to the U.S.’s $190B in gold and foreign reserves).
The republican lawmakers would ask for the family to grow itself out of this mess. In order to cover the shortfall in savings and credit card interest payments, the family would somehow need to increase its pre-tax annual income by $11,233 or 20%…and that still doesn’t make a dent to the massive credit card balance.
Truthfully, the quickest way out of this insolvency would be to fire Uncle Sam and hire bankruptcy lawyers. Fortunately, if it comes down to it, the one area in which neophyte-politician President Trump has a lot of experience is debt refinance & bankruptcy protection.
So, why do very smart Ivy-Leaguers on both sides of the isle continue to offer stupid solutions? Very simple. They are worried about their own jobs.
The politicians in Washington D.C. refuse to tackle Social Security & Medicare because doing the fiscally prudent thing would get them fired. Instead, they impotently offer up the grow-yourself-out-of-the-problem or the increase-taxes-a-few-percent solutions. Politically wise, but intellectually empty.
When Social Security was established in 1935, the life expectancy was 62 years old. Not so coincidentally, the Social Security age of redemption was set at 65 years old. Life expectancy is now 78 for men and 81 for women. To right our budget (and protect Social Security from defaulting), Congress would need to reset the age of redemption somewhere around 75. Do you think “Budget Hawk” Paul Ryan or Nancy Pelosi would take the lead on something like this? Don’t hold your breath.
Similar painful cuts are necessary for Medicare, but there’s no moral fortitude in Congress to make that happen either.
So, in a nutshell, our “leaders” in government are not willing to make the tough but necessary decisions if it comes at the expense of their own careers. The most they are willing to do is to “fight” for change if the polls convince them to do so. But that’s not leading; it is the definition of following.
So, where do we go from here?
Well, here’s an idea that can save America trillions—pay the 535 members in Congress $20M each if they a.) can sign into law this year a bill to reduce the debt by $750B per year for the next ten years and b.) promise to never get involved in federal, state or local politics ever again.
That would bring the debt in 2027 to under 65% of GDP, which is sustainable. Once their terms expire, the 535 congressmen and women can all retire from public office with the same amount that they would have otherwise made as lobbyists. We simply would be cutting out the middle-man.
I imagine that my plan won’t get much traction, but the good news is that even if we maintain status quo, the U.S. won’t default anytime soon.
Why? Well the $19.8T debt is financed with U.S. Treasury Bonds/Bills; about 25% of that is foreign owned. In fact, the Japanese and Chinese each own $1.1 Trillion of that debt. A U.S. default would be devastating to both Asian giants. Each would rather prop up a zombie than watch it die. (I enter into evidence (Exhibit A) Chinese State Owned Enterprises and (Exhibit B) Japanese corporations.)
The U.S. debt is not exactly a Ponzi scheme because the senior debt holders aren’t getting rich, rather it is analogous to the concept of mutually assured self-destruction. For the foreseeable future, America can keep rolling over the debt because the alternative is too scary for the creditors to contemplate.
If only Greece, Spain, and Italy had it so good…