The United States is $10.2 trillion in debt. Like countless Americans, our government has spent beyond its means and needs help getting back on its feet. We recently received a panicked email from White House Budget Director Jim Nussle…
I can’t stop spending! I’ve tried the whole “control your spending” thing, but it just isn’t working. I’m $10 trillion in debt and I only make $2.5 trillion per year, and now this Bernanke jerk put me on the hook another $1.5 trillion! My boss is breathing down my neck and China is threatening to repossess all my stuff.
Please, what can I do?
Calm down, Jim. You too can escape from debt by following a few basic budgeting principles. Let’s take at look the government’s budget and see if can’t benefit from some personal finance wisdom.
Take the scale down a couple thousand notches and the United States Government is like a divorced father working to make ends meet. The poor guy makes about $30,000 per year and grapples with a seemingly inescapable debt of $90,000. Instead of paying down the debt’s principle, he spends slightly beyond his means, about $32,880 each year, ensuring that that his coffers won’t overflow anytime soon.
Each year, he sits down and writes out a detailed five-year budget that always puts him in the black towards the end. He promises to start paying down the debt then, but in practice, the extra cash never materializes. It’s not that he doesn’t have good intentions. His spending is just too unwieldy.
He has two types of expenditures: personal and court mandated. His personal expenses are the basics. He pays for rent and food, and the occasional beer at the neighborhood bar. Nothing too extravagant. It’s becoming tougher to justify those little luxuries as his other expenses have grown. By order of the court, he must pay his ex-wife significant alimony, plus child-support for their growing kid. He could save money by eating out less or watching the game from home instead of heading to the bar for a pint, but those unpopular choices wouldn’t make anybody happy.
These are the pretty much the choices facing the U.S. government, but on a drastically larger scale.
How Much Do We Owe?
The U.S. debt is huge. The interest payments alone cost more than $400 billion. China is our Master Card and Japan is our Visa. As a society, we owe them $2 trillion, plus interest. And every single day, we borrow another $1.5 billion.
What’s All This I Hear About A Deficit? Is That The Debt?
No. The deficit is our yearly contribution to the debt. When politicians talk about slashing the deficit, they mean that *this year* we will still add to the national debt, but maybe not as much as we thought. Presidents habitually propose “balanced” budgets that slash deficits year after year, ending with a balanced budget after five years. Ignoring the fact that Presidential terms are four years, those proposals mean that the government will continue to add to the debt for every year except the last, when we will contribute nothing to debt, but won’t do anything to reduce it either.
When the government spends less than it receives, we have a surplus. This is rare. Surpluses come with the same choices as holiday bonuses. You can blow them on iPods (or F-22 Raptors,) or pay off your student loans and credit card bills (or Social Security.)
Why Is The Planet’s Wealthiest Nation In Debt?
Just like our hypothetical divorced father, the U.S. has two types of expenses: discretionary and mandatory. Discretionary spending accounts for one third of our budget and funds all the those nice little things that we want, but aren’t required to fund. This encompasses most agencies you know about, like the Pentagon and the Departments of Agriculture, Education, State, Labor, Justice, Transportation, Commerce, and Homeland Security. All of it is nice, but if Congress wanted, it could quickly swing the legislative mace and kill off the FBI and the Navy.
Discretionary spending is also the source of those pork barrel projects that get Senator McCain in such a huff. Technically, pork barrel projects benefit the residents of one Congressional district—think of that spiffy new park down the street—rather than further any national aim. In a budget of nearly $3 trillion, they cost around $18 billion.
The vast majority of the federal budget is eaten up by the mandatory spending that funds our social safety net. The big entitlements are Social Security, Medicare, and Medicaid. The cost of entitlements is driven by the number of eligible citizens, rather than the annual Congressional appropriations process. To our divorced father, they are the court-ordered child support payments.
Congress has the ability to tweak entitlement program eligibility, or scrap them altogether, but politicians don’t like futzing with our entitlements because it’s one of the easiest ways to get fired.
Don’t Mention The War!
You may have noticed, we’re at war. The wars in Iraq and Afghanistan add to our national debt, but not to our deficit. How? Emergency spending. Congress doesn’t have a rainy day fund like most responsible families. When the United States’ car breaks or we have an unexpected health scare, Congress waives its few existing budget rules and appropriates emergency funds, adding to the debt like any normal expense. For those keeping track, the wars have added almost half a trillion dollars to the debt.
Even in peacetime the Pentagon guzzles nearly half a trillion dollars annually for its operating budget. The defense budget is so large that it was one of the only points of reference for the recent $700 billion bailout.
Ok, Debt Is Bad. How Do We Reduce It?
If our hypothetical divorced father can reduce his debt, so can the government.
Keep A Budget: Well at least this one is covered. We have a budget and we know exactly where our money goes. See, here’s the President posing with his newfangled “E-Budget.” To make your own slightly less fangled version, read our post on How To Build Your Own Budget .
Acknowledge The Problem: Hmm, well, we kinda have this one covered. Maybe you remember that Perot fellow, the one with the ears and the oil who loved talking about our debt? He got it. Some of our politicians get it, but Oh! New Program! WANT!
Stop Digging: This means balanced budgets. The government won’t ever pay off its massive debt unless it stops sending more than it takes in year after year. Balanced budgets are only the first step. We really need more money.
Make Small Cutbacks: Um, yeah. Whole think tanks devote their time to finding “small cutbacks” that might save a little cash. If the government really was a divorced father, we’d point him to our post: 5 Expenses You Can’t Afford If You Have Credit Card Debt.
Start An Emergency Fund: Lockbox, anyone? This was one of the original ideas behind Social Security and Medicare: start a separate fund with a separate funding stream, and keep the big bad mess away from our annual operating budget. It didn’t take Congress long, those naughty little rascals, to figure out that the big box labeled “COOKIES – DO NOT TOUCH” was filled with yummy, yummy cookies, on which they’ve been feasting ever since. Now the trust funds, as the President likes to point out, are filled with IOUs. Whoops! You, however, are more disciplined than Congress, and have no excuse for failing to fund a rainy day fund.
Snowball: You have an edge over the government in that you can start a debt snowball, paying off your smallest balances first and then applying your newfound cash to payoff the larger balances. The government doesn’t have “small” and “large” balances. They simply owe tons and tons of money. Revel in your superiority by reading our post: Use Snowball Method Spreadsheet To Pay Off Debts
Make More Money: This means raising taxes, the government’s nearly exclusive source of income. Everyone, even people who want more government programs, hates paying taxes. There’s nothing pleasant about it. But it’s the only way the government can raise cash. We need to pay for all those nifty services like the Do Not Call List and the Pentagon.
Spend Less: This means cutting services, like that Do Not Call List and Pentagon thing we like so much. Rarely can we agree on what to fund, let alone what to cut. In a budget of $3 trillion, canceling the government’s cable service doesn’t amount to much. The big dollar savings come from staunching the future cost of entitlements or scaling back defense spending, but good luck getting the needed votes in Congress.
But Isn’t Some Debt Ok?
Some debt is the natural byproduct of a healthy society that reinvests in its future. Just as student loans are investments to boost future earnings potential, the government funds projects that can improve society and the economy. We can all agree that the interstate system is rather spiffy.
Economists bicker over how much debt relative to income is healthy for the economy, but most everyone accepts that a reasonable amount of debt—however much that may be—is alright, much in the same way that carrying a mortgage isn’t fundamentally bad.
Public policy is the constant, painfully entertaining struggle to provide the right services at the right tax levels. When you realize that cutting spending means fewer police officers or raising the retirement age, and that making more money means raising your taxes, you begin to understand why we have a $10 trillion debt.
What Can You Do To Reduce The Debt?
The most important thing you can do is to keep paying your taxes. If you are feeling especially charitable, you can make a donation directly to the treasury. Make your check payable to the Bureau of the Public Debt, and in the memo section, write: “Gift to reduce the Debt Held by the Public.” Mail your check to:
Attn: Dept G
Bureau Of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188