7/22/2011

Now can we please raise the debt ceiling?!

I wanted to look at how bad it's gotten just by looking at the numbers we're up against. What we are arguing over is money the US takes in vs. pays out in obligations. At present time the government spends $3.834 trillion, and takes in $2.567 trillion. You should already see the problem. We're spending $1.267 trillion that we don't have. So where do we get that from without raising taxes?

By issuing more bonds, but we can't do that until this debt ceiling is raised. See we've been doing this since the 1980s. We spend more than we take in, and to get money we sell US Treasure bonds to people to keep operating. However, the debt ceiling is a law on the books that states the US Government won't borrow more than X, and every time we reach X Congress votes to raise it to Y, sells more bonds to cover the deficit, and we keep going. And, people are perfectly happy to buy them because the USA has NEVER defaulted on those obligations.

Now of that $3.834 trillion in spending some of it is allocated by law. By law we have to spend it. If we wanted to change it Congress would have to create a new law that cuts that spending. These are things like Social Security, Medicare/Medicaid, National Debt Interest, Income Security, and Veterans Benefits. This doesn't get discussed much because passing a law to cut these is really difficult, and politicians, on both sides, don't want to be the one that slashes these because they will be voted out. Some of these you can't do anything about like National Debt Interest. You don't pay that and that spells default, USA gets it's AAA rating slashed, interest rates rise up, babies die, and Jesus weeps. The $250 billion in National Debt interest is interest on all that borrowing we keep doing. For the remaining items Social Security, and Income Security are funded by specific taxes. If you cut those programs it doesn't help because those special taxes can't be used to pay for other spending. That is illegal. So what does that leave? Medicare, Medicaid, and the discretionary budget as places you can cut. I'm leaving Veteran's Benefits out of it because it's $68 billion which even you completely cut it to zero it would contribute squat, and persons who cut that thing would make Casey Anthony look like Mother Teresa.

What we're really talking about is the Discretionary Budget which in 2011 is $1.415 trillion dollars of which 63% ($895 billion) is spent on Military spending, and 37% ($520 billion) is spent on non-Military spending. In 2004 the Discretionary Budget was $782 billion and 51% ($399 billion) for Military Spending and 49% ($383 billion for non-Military Spending). That's a 58% increase in the budget in 7 years. You'll also notice how much the military percentage of the pie has increased. That means it's rising at roughly 6.8% per year. More than twice the typical 3% inflation rate. But, the more disturbing trend is military spending has increased 12.3% per year while non-military spending rose only 5% per year. Why is that important? Because Discretionary Military spending is single largest expense the American government pays out, hence if we really want to make serious cuts it has to start with the military spending.

If we didn't want to raise the debt ceiling we need to come up with $1.267 trillion by cutting spending or raising taxes. If we didn't want to raise taxes and you don't want to cut the non-Discretionary items, then we'd need to cut $1.267 trillion from the $1.415 trillion Discretionary budget. That would leave $148 billion for the government (both military and non-military) to run on. Our government couldn't function no matter how much the Tea Party wishes that were true.

What if we consider the full budget for cutting funding. In order to cut spending enough, so we don't have to raise taxes, we'd need to cut 58% from Discretionary Military spending, Discretionary Non-Military spending, Medicare, and Medicaid. If we included Income Security in those cuts we can get it down to 46% cuts across the board. And if we included Social Security it'd be around 36% cuts across the board.

Ok so let's look at it from what we'd need to do to raise taxes to cover it. In order to get $1.267 trillion more we'd need to increase taxes by 50%! 50% tax increase would cover the deficit without cutting any spending. Now if you thought cutting spending to cover it was insane. Raising taxes by 50% is bonkers. I can't afford a 50% tax hike as I bet neither can you, and corporations would get a shock so bad Wall Street would absolutely freak their shit. And, send their K Street soliders to figure out a way to shirk their responsibility. Yep same song different verse. So even if you could pass the bill I bet they couldn't collect on those taxes.

Those are the two extremes of the argument. You can't cut your way to a balanced budget, and you can't tax your way one either. However, getting really serious about fixing those problems means serious cuts and serious tax hikes. Looking at closing loops holes to raise revenue, and cutting spending is the only way you could reasonably do it. But again, there's no perfect answer given the constraints. It will still require serious cuts, and tax hikes. Even raising taxes 10% you'll need to cut $1 Trillion in spending across the board. That is going to be very hard. What about the Bush tax cuts? Even rolling those back will only add $300 Billion-ish in revenue.

The easiest way out is to raise the debt ceiling because defaulting will have tremendous consequences. And, to think it will get worked out if we miss the Aug 2nd deadline is a farse because we're already on borrowed time. This thing was supposed to get wrapped up 6 months ago, and the Treasury did some funny accounting to get more time. They've been in a stalemate since then. So if they can't figure it out in 6 months what makes you think they'll figure it out in another 6 months when the Treasury is out of money? They've been living on life support for 6 months.

So given all of the facts can we please just raise the debt ceiling? My 401K doesn't need 3rd shot to the junk in 10 years.