National Debt: Whose Problem? Whose Solution?

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My family loves to discuss political issues with great heat and force. For the most part, I stay out of these discussions, because I know how much I don’t know. I am not an expert in foreign policy, economics, government or anything else, so it seems presumptuous to pontificate as if I’m the font of all wisdom.

But when someone speaks with authority and without demagoguery, and it makes sense, that tells me what they have to say is important. So I would like to introduce you today to my uncle, John Luth. If you read the link, you’ll see that this is a man who knows financial and economic matters. I asked his permission to share some of his comments from a recent email discussion, because he’s bringing up a point that I have not heard anywhere else. (Bold face emphasis is mine.):

“Unfortunately both parties are equally at fault. Even the ‘cost cuts’ are against inflated spending in the future as opposed to real cuts.

We need to raise revenues (read income AND social security taxes) significantly AND cut dramatically our spending AND increase everyone’s personal savings rates from < 5 pct to > 10 pct. Folks, we really are out of money and another 2-3 years of the current deficit spending and we will never, ever recover as the math doesn’t work very well now (without all of the above), but once we hit 115-125 pct debt to GDP we will never be able to get debt to go anywhere but flat to up.

I believe the lesson learned (reflected in that trillion dollar loss in US equity values) is that nothing short of the threat of a bullet to the brain will get Washington to make a decision, which is what Wall Street and Main Street are finally realizing. Sad that both ends of the politcal spectrum control our only two political parties.

In a global economy significantly higher tax rates simply mean companies, jobs and even wealthy individuals will, at the margin, leave theUSfor better environments – likeCanada.

As a business owner, my effective tax rate is around 44 pct on average right now, before including social security and medicare taxes I pay both sides as the business owner, so my real tax rate is well over 45 pct, and actually over 50 pct on the first $100,000 of my income subject to social security taxes. Notwithstanding that, wealthy individuals in the US (like me) need to pay significantly more, but the tax base is too narrow to only raise taxes on the top 10 pct – we are too large of a country and too much in debt. And that is where I believe ‘moral courage’ will fade…and we will be in the ‘smoke and mirrors’ world of ‘government accounting’. Reagan (and later Bush) gutted our tax base (both individual and corporate) and now, at the critical juncture when we need more consumer spending, we ALSO need more tax revenue from the ‘middle class’ – and that is the sad state of affairs.

Gov’t expeditures need to go down significantly in today’s dollars, not inflated dollars – and that, unfortunately is where even the Republican members of Congress don’t have the experience, courage or even educational background to deal with these issues.”

If you comment, and I hope you will, please avoid the blame game. I have readers, friends and family all along the political spectrum, from the far right to the far left and all along the middle, like me. I don’t want any more useless hurling of accusations, blaming one side or the other. The fact is, we are ALL part of this. We created the culture of spending and excess ourselves, not just with our ballot-casting, but in the way we live our own lives. If you noticed above, part of Uncle John’s solution is us. Not as participants in the political process, but in the way we handle our own money. (See para. 2 of his quote.)

5 thoughts on “National Debt: Whose Problem? Whose Solution?

  1. I remember watching Robin Roberts, the co-host of “Good Morning America”, interview Dave Ramsey one morning in 2008. What I remember is the disappointment I felt in Dave Ramsey’s responses. Every question that Robin asked about the United States financial situation then was, “What do you think the government should do about…” or “How do you think the government should respond to…” I was waiting for Dave Ramsey to point out that the best response would not come from the government, but from the people.

    Government is not the answer to the problem, it is the problem.

    A matter of personal responsibility needs to be taken into account. I hear stated all the time that “If I ran my checkbook like the government runs theirs, I’d be in jail.” The fact is, most Americans do run their checkbooks like the government runs theirs. Is it any wonder that the number of Americans in personaly financial debt crisis should be reflected in the government as a whole? That’s part of the cause of the financial crisis. Americans, both as individuals (though not all) and as a collective (unfortunately, all), are in over their heads in debt. We are living outside of our means. What happens when the national debt does out strip the GDP? The government could collect every dollar of every individual made for a year, and still not pay off the national debt. As I’ve said earlier, it is a systemic problem. Like your uncle, I think both parties should be held responsible for the mess, which is why I often find myself leaning more and more towards third party candidates. Some say voting for a 3rd party is a waste of a vote. My vote is my voice, and by voting 3rd party, I’m expressing my displeasure with the current ruling class. That’s not a wasted vote, it is a statement. Anyway, that’s enough from me.

    Thanks, Kate, for passing on the insights of your uncle. When the government declares bankruptcy, I hope to have my personal financial house in good enough order to survive it.

    • “Is it any wonder that the number of Americans in personaly financial debt crisis should be reflected in the government as a whole?”

      Yes, exactly.

      I’ve always thought it was overreaction/panic-mongering to talk about the government going bankrupt. Not sure now. I’ve also often thought that another Great Depression might be the best thing that could happen to America in terms of getting priorities back in order. But I’ve been taken to task for saying things like that before, and I have to admit that although I can see how it would benefit us, I have no desire to live through it.

      I interviewed both my grandmothers a few years ago, hoping to get a first-hand account of the Depression. Oddly enough, both of them shrugged and said it really wasn’t that big a deal. But the thing is, they were both living on farms that were largely self-sufficient. I’m nowhere near self-sufficient.

  2. Jenny Keely

    Okay, this is one of the many (possible) ways to expose my ignorance about this, but regarding our personal savings…is it advantageous to the country for individuals to acrue personal savings because that is more that is available to the banks to use??? Because fewer people are defaulting on their personal debt??? Someone please enlighten me.

    • Well, like I said, I’m far from the expert. Maybe I can get my uncle to stop by. 🙂 I don’t know if it would help the banks to have more $$ in their coffers. I think the problem with people not saving enough, and (related) living beyond their means, by racking up debts–cars, mortgages, second mortgages, equity line of credit, credit cards–is that they are accruing massive amounts of debt to get things they really can’t afford anyway, and in the meantime not saving for the future. This puts them at risk of landing on governmental rolls when disaster strikes. You know, lost job, disability, aging out of the work force unwillingly, medical bills, you name it.

      And the point is that if this is cultural, if this is how most people in our country live, how can we expect our government to behave any differently? It’s made up of people who have absorbed that influence.

  3. Kathleen I think you are right about people who live beyond their means being at greater risk for financial disaster and needing a government bailout. I think another problem is that we have developed a sense of entitlement as a people. If I don’t have the things that I think I should, then I lobby my government to give them to me–healthcare, pension, housing, food, car,….and once I have it, then I get dependent on it. To use the favorite example of the day, “everyone” wants healthcare reform because healthcare costs too much–but no one wants to talk about what THEY are willing to give up in order to make healthcare more affordable. This cheaper healthcare is supposed to include birth control at no out of pocket expense, regular check-ups, as well as the most advanced care possible for whatever ails me, no matter how low the chances of success.

    Personally I think the cure for national budget problems is simple. If the government deficit spends this year, next year taxes are automatically raised enough to 1) pay off this year’s deficit and 2) add the deficit amount to the next year’s budget. In other words, if the budget this year calls for expenditures of 1.2 trillion and tax revenues this year are 1.2 trillion, tax rates remain the same. If at the end of the year, we spent 1.3 trillion, tax rates are raised enough to provide .1 trillion to pay off last year’s deficit and .1 trillion more to spend because we assume spending isn’t going to decrease–and if it does, we can use the money to pay down the deficit. If every time the government spent more money it had to raise taxes,people would stop clamoring for more government spending.

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