3 Steps to Wipe Out the National Debt – By a Humble Dutch Guy

According to the National Debt Clock as of December 6, 2010 the total national debt for the U.S. government is a staggering $13,845,864,407,468.84.  Yes, that actually is 13+ trillion dollars!  Not millions, or billions, but trillions…!!!

It may come as a surprise to many of you, but the United States of America has almost always carried debt.  It all started with the American Revolutionary War when debt was issued to finance the war against the British Empire.  By 1791 under the Articles of Confederation the federal government reported a debt total of $75,463,476.52, which in those days was a huge amount of money.

Over the years, the debt has grown steadily, only to briefly come all the way down to zero under President Andrew Jackson.  Believe it or not, but January 8, 1835 was the only recorded date in U.S. history that our federal government had no debt at all.  It didn’t last long; within a few years the government was back in the red in the millions of dollars.  By the time the Civil War broke out, the government had already racked up $65 million in debt; only to see it skyrocket during the war itself.  By the time the war ended in 1863 the U.S. government was $2.7 billion in debt.

US Govt Debt

If you look back at history from the revolutionary war until today you will see an easy trend; every time the U.S. government (congress) declared war the national debt skyrocketed.  It happened again during World War I and then again for World War II.  By the end of World War I the total debt had hit $22 billion, but by the end of World War II it was increased to $260 billion.

After this period, a steady increase was shown, but only at the rate of inflation, so in essence the government managed to keep the debt in check.   By the time Ronald Reagan took office, the national debt stood at $909 billion, which was still manageable.  However, within three decades, the U.S. government managed to increase this debt to over $13 trillion!

Many economists and politicians have debated the national debt over the years.  Some have given doomsday scenarios wherein we as ‘the People’  will have to declare bankruptcy in the not too distant future, whereas others have been preaching that we can continue to pile on the debt provided we keep the economy growing.  I won’t bore you to death with the pros and cons, but the one thing we all should agree on is that not having any debt is good for everyone.  It will lead to lower taxes (and being able to pay for it), more money for other programs and it won’t put so much pressure on the dollar and thus it will be healthy for the U.S.  economy overall.

So how do we go about getting out of debt?  By following these 3 steps:

1) Balanced Budget Amendment

There are many critics opposed to a balanced budget amendment as it could be considered detrimental to the U.S. economy during times of economic retraction.  Another criticism is that it would take power away from congress.  However, a well crafted amendment will put those fears to rest.

Tax Revenue Vs. Expenses

There will be one exception to the new amendment for not balancing the budget; if the U.S. or its territories are attacked directly by a foreign government/entity, only then will it be allowed to draw emergency funds.  It doesn’t mean we can’t get involved in foreign operations, but our involvement will come with an invoice.  So if South Korea gets attacked by North Korea again, we’ll be more than happy to help out and defend (and defeat) the North Korean army, but after the fighting is over, we will demand payment to cover all costs, no exceptions.

Congress will be required to submit a balanced budget before the beginning of a new fiscal year.  If congress can’t come to an agreement, then emergency measures will kick in.  This will be in the form of a set of complex formulas based on the current budget.  I can’t think of a better way for all parties to sit down and compromise (finally).

The balanced budget amendment will comprise of three important sections:

1) Current operating budget for entitlement programs, defense, education, etc.

2) Paying down the principle of the national debt

3) Emergency fund for such disasters as earthquakes, hurricanes, and more important recession, etc.

All three sections are based on percentile formulas and it’s based on the U.S. government paying of its debt within 20 years.  In order to do this you would need to spend $503 billion per year on the principle payment of the national debt.  For those of you paying attention, that may not make sense since that would only amount to $10 trillion after 20 years, but don’t forget the government is already spending $600 billion per year on debt payments (mostly in interest).  As with credit card payments, if you keep paying down the principle your interest totals are going down, yet if you continue to pay the same amount every year your principle amount will start decreasing more rapidly (see chart below).

The emergency fund, managed by Homeland Security (FEMA), should be set at $50 billion and adjusted every year for rate of inflation.  To the critics mentioned above; fluctuating economic cycles would still require congress to set the budget, provided it doesn’t spend more than it takes in for its operating budget.  The emergency fund can be used for times of recession.  Besides, increasing the transportation budget alone (see 4 Ways to Bankroll America’s New Infrastructure) will ensure that recessions are short-lived.

The government took in $2.1 trillion in receipts for 2009, but spent $3.5 trillion!  So now what?

2) Austerity Measures – Spending Cuts

Once a balanced budget amendment is in place it should be fairly easily to cut spending across the board.  Cut wasteful spending (Medicare and Medicaid are notoriously ridden with fraud, etc.).  Cut discretionary spending and start making tough decisions on cuts in defense.  There’s nothing un-patriotic about cutting waste.  We have eleven aircraft-carrier strike groups, nobody else in the world has more than one.  Will it really hurt us if we cut back down to eight or nine?  We have more than 40 generals, admirals or senior civilian equivalent working in Europe.  I hate to bring it to you, but the cold war ended a long time ago!

The wars (Iraq and Afghanistan) alone cost the government $150 billion per year.  On top of that, cutting back on overseas cold war era bases and unnecessary weapons programs, that even the Pentagon doesn’t want, can get us another $100 billion easily.  I’m not saying we should completely get out of Iraq and Afghanistan, but having CIA officers on the ground and predators in the air is a much better way, let alone cheaper way of fighting terrorists then having tanks on the ground.

Predator RQ-1

Sorry Karzai, we’ll be watching your country from the safety of our Nevada military bunkers while operating the predators, but the troops are coming back to the U.S.  The same goes for Iraq and the same goes for many overseas bases, which serve no purpose after the cold war ended.  Don’t worry; we’ll still have missile defense systems and the best ICBMs in the world to wipe out humanity in certain areas of the world, if need be…

Unless the economy starts growing at the rate of China, I’m afraid the receipts for the U.S. government won’t get us over $2.8 trillion, which is what’s needed to balance just the operating budget.  It doesn’t account for the emergency fund and the principle debt payment.

3) Austerity Measures – Tax Increases

$2.1 trillion in receipts is an exception to the rule, since the U.S. was in a deep recession.  Receipts will be over $2.8 trillion or higher in a healthy economy.  However, in order for the U.S. government to have an operating budget and pay for emergency funds and debt payments we’ll be faced with a harsh reality: spending cuts alone will only get us in shape for the operating budget, but won’t provide enough funds to pay down our principle debt of almost $15 trillion in a few years.

Federal Tax Revenue

We already said that we’d need $503 billion for principle payments on our national debt and we need $50 billion for the emergency fund (plus inflation).  So we need to come up with $553 billion in extra funds, assuming the austerity spending cuts will cover the operating budget.

I’m all for tax cuts.  I like them as a tax payer, but I’m also a realist and we can’t afford tax cuts when we owe $15 trillion, which jeopardizes the economy in the long term.  So let’s change the tax code once and for all and use three steps to do it:

1) Simplified tax code: I’ll go more into detail in a future post, but simplifying the tax code will generate over $250 billion in added revenues.  It’s mostly closing tax loopholes and doing away with certain tax deductions.  There is no need for direct tax increases for the lower and middle income groups.

2) National sales tax (VAT): Yes it won’t be very popular, but a 5% national sales tax on goods and services is needed to generate another $250 billion per year.  Even when adding in the state taxes the total would still be less than most European nations, which have a VAT rate between 15%-25%.

3) Increase in income tax for the wealthy: Yes, here again it’s not a popular idea, especially with the Republicans, but over and over again economists and even Bill O’Reilly from Fox News have said that increasing the income tax on the wealthiest Americans doesn’t hurt the economy.  Somebody making $10 million per year won’t invest the extra $100,000 earned; it’s been proven.  This should generate an additional $50 – $75 billion per year.

Remember, once the debt is paid off in 20years, we can reverse some of these measures, such as the national sales tax.  The important thing will be that the government will get its books back in order and after 20 years it’ll be confronted with a great problem…what to do with the extra $1.1 trillion in revenues per year!  We owe it to our kids and our grandkids to get this country back in financial shape, so that they can have a prosperous future ahead.

What are your thoughts on this subject?