There’s lots of talk right now about the federal budget. Some people say “if we don’t raise the debt ceiling, we’re going to default” or “we need to raise the debt ceiling to preserve the full faith and credit of the US Government.” Others threaten the future of Social Security and military pay checks. Is there any truth to these statements? And what are all these terms, what do they mean? One of the ways politicians get their way is to use obscure language and scare tactics. Let’s look at the reality of the situation.
National debt refers to the $14,342,954,633,916.41 that we owe our creditors (like China). The federal government sells Treasury Bonds to other countries (and individuals) with a promise to pay them back at a future date (typically, 30 years), with interest.
Deficit refers to the difference between what the government makes (primarily through income taxes) and what it spends on things like the National Endowment for the Arts (currently budgeted at $155 million, though Obama has requested increasing it to $161.3 million), grants to the United Nations ($6.4 billion in 2009 alone), and subsidies to things like Amtrack ($1.6 billion per year.)
Debt limit refers to the amount of money, based on the federal budget approved by Congress, that we are allowed to borrow from other countries.
So let’s put this into terms everyone can understand: a household budget.
Say you have a mortgage, car loan, and Visa card. The amount you borrow is your debt: $100,000 for your house, $20,000 for your car, and $5,000 on your credit card would be a household debt of $125,000.
Let’s say your job pays you $2,000 per month. And to make math easy, say your mortgage payment is $1,000 a month, your car loan payment is $250 a month, and your minimum Visa payment is $50 a month. So right off the top, you have to pay $1,300 a month to your creditors, leaving you $700 a month for “discretionary spending.” Utilities, gasoline, food, insurance, entertainment… they all fall under “discretionary spending”. It’s discretionary because you can decide to eat steak or hamburger, you can opt for the $150/month cable package with all the premium channels, or opt to just watch the “basic 4” with an antenna. You make decisions based on how you want to live and adjust your spending accordingly. Now if you spend more than $700 a month on your discretionary spending, then you have a “household deficit”.
Now if you have a household deficit and assuming you have no savings, the only way you can continue to live the lifestyle you’re accustomed to is to either 1) increase your income or 2) ask for another loan. If you decide to get a home equity loan or raise your credit card limit, you’re “raising your debt ceiling.”
For the sake of the argument, say you get a home equity loan for $20,000. This increases both your household debt by $20,000, and negatively impacts your monthly budget because instead of $1,300 a month in monthly debt, you now have an additional $150 a month you have to pay the home equity loan. You can see how this snowball effect continues to the point where you’re living almost entirely on credit… and borrowed time.
This is where our country is today.
And rather than looking at what we can cut, we are being told we need to keep spending and just borrow more. The fastest way to cut $1 trillion from the budget would be to just go back to what we were spending 4 years ago. But we’re being told we can’t do that. Some politicians in Washington — including Obama — are saying “we need to increase taxes” to fix the problem. This is like saying “you’re already working 60 hours a week… just work more,” instead of looking at the budget and deciding “we need to drop the HBO and stop buying the $17-per-pound steaks and switch to $3-per-pound ground beef.”
Don’t be fooled, America. We still have the money to pay our debts, including Social Security and military pay. It’s time to cut the premium cable and start enjoying Hamburger Helper.
Want some ideas where we can cut from the federal budget? Check out Citizens Against Government Waste’s “Prime Cuts” whitepaper. The PDF can be seen here. — ed