The Budget Crisis Explained to a Nineteen-Year-Old

[Marshall]

The Budget Crisis Explained to a Nineteen-Year-Old

By Henry Percy


A junior in college majoring in finance asked me the other day what I thought of the negotiations coming out of Washington, D.C. I'll call him Arthur.

Not much. The premise is raise taxes now, and a future Congress will make cuts later. Trust us. Trust us. Yeah, sure. How can any Congress promise to tie the hands of a future Congress?
The Demos and MSM have made much of S&P's threatened downgrade of US bonds from AAA if we don't raise the debt limit. Well, the S&P report also said that they need to see significant budgetary reform too, i.e., regardless of lifting the debt limit.
Bottom line: Congress can scramble and pass the debt increase, pat themselves on the back, and still get the bond downgrade because their "Grand Bargain," or whatever they call it, is transparently a fraud. Why don't they call it the Faustian Bargain?

Arthur:

I thought the Gang of Six's proposal was to cut close to $4 trillion off the debt over the next decade through tax changes and cuts, am I wrong about this? And that's pretty lousy; what's the point of even raising the debt ceiling if our credit is going to take a hit either way.

Me:

$4 trillion / 10 = $400 billion per year (assuming that the cuts would be evenly spread, though we know they love to backload them in what they are fond of calling the "out years"). But the deficit is running $1.6 billion / year. So the $4 trillion does not really even begin to get a handle on the problem. How about this for a headline: "Grand Bargain Leaves Deficits of $12 Trillion over 10 Years." Think we'll see that?
Our beloved politicians calculate "cuts" based on what's called the current baseline plus projected increases in spending due to inflation and population growth and "need" and wants and various other fudge factors. Under Obama the baselines have risen dramatically. So a "cut" does not even get us back to where we were in the days of the Bush terror, when deficits ran $400 billion and the Demos were screaming that the sky was falling.
According to the WSJ this morning, the Gang of Six's talking points sound fairly OK on paper, but they're just that: seven pages of broad suggestions. Those will be taken up by the various committee chairmen in the House and Senate, and no one, no one can predict what will come out of that process. Which process will drag out for months and be repeated every year for the next 10 years, long after most of the current actors are out of office, in order to realize the purported "savings."
So the best you can say about such a "plan" is our "public servants" are saying, "Let's kick the can down the road and see if we can make it past the next election."

Arthur:

When you say the deficit is $1.6 billion per year do you mean $1.6 trillion? If that's the case then the Gang of Six's plan sounds almost entirely worthless if we'll still be running a deficit of $600 billion.

Me:

Whooops, you're right. Billions, trillions--it's all just zeros, right?
But it's worse than that: $1.6 trillion - $400 billion = $1.2 trillion deficit / year as far as the eye can see. After the cuts and tax increases.
As you can see, I easily fumble the zeros. I'm sure the vast majority of the public does as well. So I looked up the numbers and translated them into something the average person can relate to.
Let's say you earn an even $100,000 per year, part of the 52% of Americans who pay taxes. You've got too much to qualify for food stamps or the Earned Income Tax Credit and other goodies, but you're not rich either, driving an old car, definitely no corporate jet waiting for you at the airport.
But wait, why are you driving an old car? Why not a BMW? You deserve it. And a Lexus for the missus? And a vacation in Hawaii? Cruise in Europe? You're wonderful, you deserve it all. Soon you're spending $150,000 per year. It's not hard, because you, not the bankers, set your own credit card limit.
After a couple years the missus gets nervous, says maybe, just maybe you should cut back. You're indignant: you have to have transportation, are you expected to drive an old clunker? And you need to relax; you'd be a nervous wreck without getaways to far-off places.
OK, you tell her, how about we cut back on our tips when we eat out? That'll save $10 per year. (This is the equivalent of eliminating the tax deduction for corporate jets, which was part of the Stimulus Bill and which Obama has hammered mercilessly, oh those fatcats in their private jets.)
The missus says that $10 is really, kinda, sorta insignificant compared to the $50,000 in new debt you're taking on every year. So at last you tell her you can embezzle $4,000 per year from your employer and cut your spending by $8,000, so you'll only slide $38,000 into the hole each year. You say all this with a great scowl, moaning about how hard it's going to be to reduce your standard of living so drastically. Then you tell her it was so much work calculating all those terrible cutbacks that you deserve a night out on the town to celebrate your newfound sobriety and prudence.