Sunday, November 14, 2010

U.S. Federal Debt, Part I, The Problem

Today, the Federal Government of the United State owes $13.7 trillion. In the last year alone we have borrowed $1.7 trillion (source: TreasuaryDirect) on an income of $2.1 trillion (source). Worse, we have been borrowing huge amounts of money, almost every year, since the early 1980s. No one, not even the U.S. government, can borrow this kind of cash (1) without eventually being unable to make the payments. Indeed, there is already speculation that our creditors are getting nervous about being repaid. Without a major change in course, default is inevitable. When default happens the government will no longer be able to borrow; requiring us to immediately cut expenditure and/or raise taxes by roughly $150 billion per month if it happened today, more if later. This will almost certainly mean:

  • Most of the U.S. military will be demobilized and all foreign bases abandoned. We will lose whatever wars we are in.
  • Social security checks will be substantially reduced or eliminated.
  • Poor and elderly people will not get medical care.
  • All federal research will end: NASA, National Institute of Health, National Science Foundation, etc.
  • Most federal employees will lose their jobs.
  • The states and cities will lose all, or almost all, of their federal funding. Many teachers, police, firemen, etc. will lose their jobs.
  • All government bonds ($13.7 trillion today) will lose much of their value, throwing the economy into a deep dive, probably much worse than the Great Depression.

The borrowing must stop, and the debt must be paid off (2). It will be hard and painful, no part of the government can be spared and taxes must be raised, but the alternative is disaster.

Right now the short term interests of all the players is to increase spending and reduce taxes, hastening the catastrophe. For example:

  • Congressmen get votes and money by reducing taxes and giving people money (or tax breaks, which, for all practical purposes, is the same thing). They lose votes by increasing taxes and cutting off the federal money spigot.
  • Republicans win elections by cutting taxes and increasing military spending.
  • Democrats win elections by increasing social service spending.
  • Government managers are severely punished if they do not spend all the money allocated. I've talked to multiple mid-level government managers who proudly came in under budget their first year, and got clobbered. They all say they will never do that again.
  • Taxpayers do not want to pay for the government.
  • Government funding recipients, including everyone on social security, everyone on medicare or medicaid, everyone using a tax deduction, and all government employees, which means all military, almost all teachers, all police, almost all firemen, almost all researchers, etc., want their income to increase.
Everyone in this country has a choice: either increase your taxes and reduce the goodies you get from the government, or go off a cliff. In the near future I will lay out one approach to accomplishing this, including changing the incentives of the major players -- particularly the most powerful, which will increase revenue and reduce the size and cost of government.

However, no matter how we wiggle and shake, we owe $13.7 trillion, which means someone is going to pay at least $13.7 trillion in taxes. There is no way around this. It won't be the poor, they don't have any money. It will be the middle class, the rich, or some combination. How we allocate these taxes will determine what kind of country we are to become. Get the $13.7 trillion from the middle class and America will be a country of a few wealthy and many poor. Get the $13.7 trillion from the wealthy and the middle class has a chance to prosper and there will be fewer extremely wealthy individuals. Choose.


  1. Note that I do not use the term 'deficit.' This is because the official deficit is artificially manipulated to look much lower than it is. For example, until recently most of the cost of the Iraq and Afghan wars were not included in the deficit. Also, until last year the social security trust fund loaned hundreds of billions of dollars a year to the treasury but this was not included in the deficit. A truer measure is the total debt, which is used here.
  2. If we continue to borrow, the interest on the national debt will hit $1 trillion per year within about a decade. Regardless of the size of the interest payments, those tax dollars won't buy one gun, fund a single research project, build a single road, pay a single teacher, or fund a single social security check. The only way to stop bleeding interest is to pay off the debt.

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