$5 Trillion and Counting

Submitted by kvaughn on Fri, 04/27/2012 - 01:00

 As of today, we have added $5 trillion dollars to the national debt since Obama took office. To put that number into perspective, it equates to roughly $45,000 per American household. We were told we had to spend this money to save the economy, but has it made us better off? Let’s consider the facts:

  • Wages are falling and are at their lowest levels since 1999.
  • Home prices continue to decline and are at their lowest levels since 2003.
  • The price of gas has more than doubled since Obama took office and is near an all-time high.
  • Tolls on the Dulles Toll Road have skyrocketed from $0.60 in 2007 to $2.25 today and an expected $4.50 next year.
  • Overall inflation is above the Federal Reserve’s target rate of 2%.
  • College student loan debt continues to increase.
  • Your household’s share of the national debt is now more than $135,000.

If we do not change course, this debt will destroy our future. Already, the interest on this debt is a significant drag on our economy. At the historical average 6% rate, the interest on this debt would cost each household more than $8,000 a year! It is immoral to pass this debt on to our children.

We can correct this problem, but it will take leaders who are willing to propose real solutions rather than pandering to the crowds. The real solution starts with defining a real budget. For decades we simply increased spending from the previous year and called it a “budget” – and for the past three years, we’ve failed at even that simple task. Then, we raised the debt ceiling to accommodate our desired spending levels. The whole process amounts to putting the cart before the horse, and it needs to change.

First, we should set our financial goal: for example, return to a sustainable debt/GDP ratio (i.e., 60%) within 10 years. We should then develop a year-by-year plan to get there. Finally, these numbers should be packaged with the necessary legislation to raise or lower the debt ceiling for the first year of the plan. Any attempt to spend money or raise the debt ceiling without a long-term financial plan should be blocked.

Once we have an approved plan, we’ll know the deficit/surplus target for the first year. Given that our revenues are unlikely to exceed 18% of the economy, based on historical data, simple math will then define how much we have to spend on various programs.

Next we need to shift from our baseline budgeting process (where all programs are renewed at their current rates by default) to a zero-based budgeting process (where all negotiations start from zero spending). This is important, because it will demonstrate that our country agrees on more things than it disagrees on – probably 70-80% of the budget.

Diverging opinions on spending priorities will require a new approach to complete the remaining 20-30% of the budget. One alternative would be to divide up the remaining budget and allow individual Congressmen to decide how to spend it – keeping the entire process transparent by requiring them to answer to their own constituents in the next election. I recognize that this is not necessarily an ideal solution, but it’s a starting point, and it can be refined into a viable way to achieve our financial goals.