We hit an ignominious milestone recently when the national debt crossed $39 trillion. Naturally, regular citizens have chimed in about what’s to blame, who’s to blame, what can be done, or does it even matter. The discussion usually takes one or more of the following shapes.
If you’re new to the conversation, just dipping your toes in for the first time, you might think we can simply cut defense spending, or eliminate “waste, fraud and abuse.” Considering how many military bases we have around the world, that’s a legit angle.
When you factor in the Pentagon’s numerous failed audits and run-of-the-mill household items running into the thousands of dollars, you could kill two birds with one stone. We’re just scratching the surface here though.
If you’re somewhat serious, in addition to those, you’re pointing out discretionary spending. Those are monies that Congress approves annually. The nearly trillion-dollar defense budget is part of it. However, all told, such spending barely makes up a quarter of the overall budget, if that.
If you’re more serious, you’re including all the aforementioned items, plus the programs on autopilot. Those would be Social Security, Medicare, and Medicaid. They are the three biggest items in the federal budget, eating up over half.
Interest on the debt—another expenditure on autopilot—recently overtook defense as the fourth-largest item. Addressing all the rest will push that one down in the process.
Social Security’s financial health has been feeling the strain of an ever-growing number of beneficiaries and a declining birthrate. The worker-to-beneficiary ratio has been cut by more than half since its creation.
Regarding health insurance, its very structure is handicapped by its third-party payer nature. When consumers don’t know the actual price of the service they’re receiving, they’re less judicious in their spending.
Regardless, you know you’ve encountered someone who is very serious about debt and deficits when they discuss attacking it at its root; the government’s ability to service it.
Investors (check your 401k) will continue to buy US treasuries if they believe Uncle Sam will continue to have the ability to pay the interest. That ability rests on the taxing power it has over productive citizens.
So why not cut tax rates and reduce that ability?
History has shown that, when they are reduced, and/or the code is simplified, the revenue flows to treasuries actually increases. This is partly due to taxpayers changing how they file, but it can also be attributed to the signal they’re getting from the government. “We’ll take less from you, and you won’t have to spend as much time filing.”
Though some would convert that time into more leisure, that might very well entail more spending. What would juice economic growth even more is if some of that spending was via investing.
Alas, more growth creates more revenues, which gives buyers of US debt even more confidence to continue lending to reliably profligate politicians. What then?
Go further. If we’re serious about reducing the national debt, the ability of the federal government to incur any more must be seriously curtailed.
In much the same way “waste, fraud and abuse” will never really go away until spending is reduced on a large scale, and the spending itself will never really go away as long as there are tax revenues, borrowing, and inflation to finance it.
Whether or not this is the biggest problem facing us is up for discussion. Being a personal financial literacy teacher who walks the walk, I find such staggering debt levels to be outrageously appalling.
The upside is that the most organic, effective solution just so happens to coincide with a higher level of freedom, and subsequent prosperity for citizens.
