Friday, July 29, 2011

Raising the (Debt) Roof

Unless you are living in a cave, you've probably heard something about this debt ceiling, how it needs to be raised before August 2nd, and how it is causing much angst among politicians.  I've been refraining from posting about the debt ceiling - mainly because I've beaten the whole National Debt horse pretty much to the point where the ASPCA is knocking on my door.  However, the whole situation has reached a whole new low that I feel compelled to speak my mind on this.

For those who are living under a rock, the debt ceiling is sort of like the credit limit for the Federal Government.  It is the total amount of debt which the U.S. Treasury is allowed to borrow.  Currently the debt ceiling is $14.3 trillion.  For those who are numerically challenged, a trillion is one million million.  In other words, it is a lot of money!  However, it isn't enough for our government because it is projected that on August 2nd, they will max out this credit limit.  When that happens, they will no longer be able to borrow money to pay their bills.  They won't be able to pay the salaries of government employees (including our troops).  They won't be able to pay our seniors their Social Security.  They won't be able to pay interest on the money they have already borrowed.  In other words, we'll be a deadbeat country. 

Some people argue that not paying our bills won't be that bad.  However, think about how you would react if somebody who owed you money didn't pay you back.  You probably wouldn't loan that person money again, or at the very least, you'd demand a higher rate of interest.  This is the fate that faces our country.  Imagine if our creditors demanded that the Government pay a higher rate of interest on its bonds.  That's more money out of your pocket and mine.  In other words, the debt ceiling isn't something to mess around with.

Now the problem I have with our politicians holding the debt ceiling hostage is that the whole concept of the debt ceiling is flawed.  Our politicians, including some of the same ones who refuse to raise the debt ceiling, voted for the various Federal Budgets over the years.  They okayed the spending, the entitlements, and the tax cuts which caused us to rack up all of this debt.  If you are going to vote in favor of lower taxes and higher spending and you don't raise the debt ceiling, you are talking out of both sides of your mouth.  In my opinion, if you are going to pass a budget where you are spending more than you making, then you are implicitly approving of borrowing the money.  To come back at a later date and say that you can't borrow the money after you approved of the spending is irresponsible.

Consider this analogy:

You decide that you are going to remodel your kitchen.  You go out and buy the flooring, the cabinets, the flooring, the appliances, and you hire somebody to install it all.  Since you are short on cash, you decide to put it all on your credit card.  A month later, the credit card bill comes, you open it up, and you see that you spent too much.  At this point, the kitchen is done.  The cabinets are installed, the appliances are hooked up, the tile is grouted.  You can't now decide that you shouldn't have bought those oak cabinets and those stainless steel appliances.  That ship has sailed.  The only thing you can do is pay the bill and maybe in the future when you are remodeling your bathroom, you'll pay more attention to the bottom line.

The same thing holds with the debt ceiling.  Our politicians have already voted to spend the money.  Those promises have been made already.  The right thing to do is to pay our debts for our past budget mistakes and consider spending more wisely in the future.  Some politicians feel that maybe they don't have to live up to the promises that we made in our past budgets.  That is wrong.  Yes, our spending is out of control.  Yes, we've cut taxes to the point where our revenue is suffering.  However, that is a problem we need to solve for the future.  What is done is done.  We've already spend the money so now we have to make good on our debts.

Many politicians say that the Government needs to balance its books like any business or any family.  Part of that is making good on your debts just like any business or any family needs to do.

Okay, so we've established that we, as a country, need to pay our bills for our past budget transgressions.  The next step of that is to fix things so that in the future we can keep our debt under control.  If you pay attention to the debt ceiling, you would think that we have $14.3 trillion of debt (and growing).  However, if we were really doing the accounting like a business, our debt would be much, much higher.

The $14.3 trillion number reflects only the amounts that the Government had to borrow in the form of issuing various bonds.  However, the Government also has a debt in the form of other promises that we've made which aren't captured in the form of debt.  Consider the promise of Social Security.  Under the current law, future retirees are promised a certain amount of money a month for the rest of their lives.  We aren't actually paying these future retirees yet, but the law says that we will have to pay these people.  The amount that we have to pay these people is a promise that we owe.  The same thing goes for Medicare heath insurance for future seniors.  The law says that future seniors are entitled to health insurance through the Medicare program which will costs us money.  We aren't paying the money yet, but it is a promise that we owe.

Business accountants use the concept of liabilities to account for future debts like this.  This allows the company to account for the fact that this is money that they probably will have to pay out in the future.  An example of this might be money that will be owed to future retirees for their pension.  If the value of the future pension payments is $1 billion, this gets included on the company's balance sheet as a liability for all to see.  Another example might be money which is expected to be paid out as part of a lawsuit.  When BP spilled oil into the Gulf, they set up a $20 billion fund to cover expected claims against them.  They didn't pay out the $20 billion right away; it stayed in their bank account.  However, they had to account for the fact that they would pay out that money in the future.

Unfortunately, the Government does not have include its future promises on their balance sheet as a liability.  Social Security alone has a liability of $7.7 trillion.  This is the value of future Social Security payments that won't be covered by the Social Security payroll deduction.  This isn't included in the national debt anywhere, but it is money that will be owed by law to future retirees.  The bottom line is that the debt problem goes way beyond the $14.3 trillion that we owe to bondholders.  We've got a spending problem that we have to address for the future.  The debt ceiling is the past; we have to make good on our past promises.  It is the future that we have to be concerned with.

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