Monday, April 04, 2011

What it means to you

Representative Paul Ryan made news over the weekend by saying that they are going to propose a budget which cuts $4 trillion over the next ten years.

The is the first proposal which actually makes a significant dent in the nation's out of control debt crisis. Let's take a look at what has been proposed up until now. I find that dealing with the numbers involved in Federal budgets causes people's eyes to glaze over. It is hard to get a perspective on what the numbers actually mean, so I'm going to use per capita figures to help you to understand what the national debt means to you.

In February, the Federal Government added $223 billion to the national debt. The population of America is roughly 307 million, so for that one month alone, every man, woman, and child in America owes $726.38. You will be taxed for the rest of your life to pay interest on that $726.38. Your kids will be taxed for the rest of their lives to pay the interest on their $726.38, and as an added bonus, when you die or retire, they will have to pay interest on your $726.38 as well. If you are married, it is quite likely that the $1,452.76 debt piled onto you and your spouse by your government was more than your house payment. This year, the debt for every man, woman, and child will be increased by $5,211. A family of four could buy a very nice new car for that sum.

Going back to a macro scale, the debt is growing close to a tipping point. When the national debt exceeds GDP, a fatal debt spiral can be induced. At that point, interest on the debt can grow faster than the economy grows, meaning that even if we suddenly stop deficit spending altogether, the debt will grow out of control until the Treasury is forced to default on the debt. As of last month, the National Debt was 97% of America's GDP, and we are adding to the debt at an alarming rate, so this is a very real an imminent threat.

Politicians have been proposing cuts to the budget to address the crisis.

Last year BO suggested cutting $100 million from the budget. This would reduce each person's addition to the debt by 32 cents. Instead of going $5,211 further into debt, you would only go $5,210.68 further into debt. Quite an accomplishment, huh? He counts on people thinking that $100 million is a lot of money. If it was in your piggy bank it would be a lot, but the Federal Government spends $100 million in less than 15 minutes.

More recently, House Republicans have been negotiating with BO and the Democrats over spending cuts. The Democrats wanted a Continuing Resolution which reduces spending by $6 billion. That is $19.54 per person, reducing the debt placed on you this year from $5211 to $5191. While $19.54 is better than 32 cents, it is still not enough to avoid a debt spiral.

The Republicans didn't do much better. Their big alternative is a CR which reduces spending by $61 billion. That is $198.70 per person, reducing your new debt to $5012. Again, that is better than the alternative, but not nearly enough.

The problem with all of these proposals is that they only consider discretionary spending, which only accounts for 19% of the budget. To get back to a sustainable budget, it is essential to reform the big entitlement programs, Social Security, Medicare, and Medicaid. That is where Ryan is different from the crowd. Politically it could be costly, as any attempt to touch these entitlements is demagogued as draconian and heartless. But how much worse would it be to allow the economy to collapse and those programs to disappear altogether as America defaults on its debts and becomes unable to meet its obligations or borrow money at any cost?

Ryan's proposal represents an annual cut of $1,302 per person. That is finally enough to be on the scale needed to make a difference. I'm not sure that the political will exists yet to make such a bold cut, and I do expect that there will be a lot of work to get the proposal into an agreeable form, but I am heartened to see someone honestly saying what will be necessary to avoid America following Greece. America's fall would be much more devastating because unlike Greece, there is no one strong enough to prop America up.

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