Is There Any Hope For Our Economy?

My comments today are so painfully obvious, they shouldn’t even need to be expressed, but it is clear that many Americans either are unaware of the problem (maybe they’ve been living in a cave for the past few years) or are in such a state of denial that they’ve convinced themselves that the United States government can simply decide to repeal all know rules of economics and common sense.

It’s interesting that many people don’t give much thought to the finances of our country. Maybe these same people don’t give much thought to their personal finances. I don’t know. But a disaster in our nation’s finances is even worse than a disaster in your personal finances, because no matter how well you handle your personal finances a bad national economy is going to hurt you.

To be candid about it, I don’t like economics. Don’t like thinking about economics, don’t like talking about economics. This is a hangover from taking economics classes that seemed eternally bound to make the simple complex. But the truth of the matter is when you get down to looking at it, most of economics is common sense. Maybe that’s why the application of it is lost on Congress. To the extent that economists – or our elected representatives – work hard to make the application of economics to our national finances sound difficult or arcane, you know they are telling you to “be quiet and let the grownups take care of these things.”

If you earn $1,000 this month, but spend $1,724, you have a DEFICIT of $724. You have borrowed $0.42 of every $1.00 you spent. Since you spent the money that you don’t have, you have a DEBT of $724. Now you have less than $1,000 available the following month, because you have to make a payment on the debt. If you have the same income and spend the same amount the next month, your deficit is LARGER than $724, because part of your income went to service the debt incurred in the first month, and now your debt is more than your monthly income. You are borrowing money to continue the same lifestyle, and you are borrowing money to make payments on the debt you’ve incurred to maintain that lifestyle. If you continue to do this, at some point you will find that creditors are unwilling to extend credit to you any longer. Additionally, creditors will probably start using any means at their disposal to accelerate the repayment of your debt. Maybe they start repossessing things that were purchased on credit.

That is exactly where the United States is now. We have a national debt of $13.562 trillion as of September 30, 2010. That’s a LOT of money. I heard a description recently to help envision $1 trillion. If you covered a football field seven feet deep in neat stacks of $100 bills, that would be about $1 trillion. Didn’t really help me. I still can’t conceive of that amount of money.

I came up with another one. If it was your job to count $100 bills eight hours per day, five days per week, 50 weeks per year (even from counting money full-time, you’d want a vacation), and you did that for 30 years – you wouldn’t count to $1 trillion. Let’s say it’s a hereditary job and you pass it on to your child when you retire, and they pick up where you left off and count for 30 years. Still not there. It would take over 46 generations (46 plus 9 years into the 47th) to count just ONE trillion dollars. Pretty amazing, but even that didn’t help. Maybe it’s just me, but I don’t think human beings can actually grasp numbers that big.

Anyway, with those mental pictures in mind, consider that our Gross Domestic Product (on a national level, pretty much the same as your household income on an individual level) was $14.256 trillion for 2009. Basically, putting it down to an individual level – we owe as much as we make in a year. And the debt levels are rising.

At rates projected by the Congressional Budget Office and the Office of Management & Budget, our national debt will nearly double by 2020. Now, that wouldn’t be quite as bad as it sounds if our GDP increased at a rate to keep up – a rate where the debt as a percentage of GDP decreased, even though the absolute debt number increased – but that isn’t happening.

For the past nine years (including this year), debt as a percentage of GDP has increased every year. Projections for this year put debt at 94.27% of GDP – the highest it has been since the years of WWII.

To make a long story short (I know – too late for that), the United States is badly in need of a financial diet. For all the talk about whether to increase taxes and if so, how much, the clear fact is that no amount of increased tax revenues is going to solve the problem. Even if leaving taxes alone permitted the GDP to grow faster and produced more tax revenue because the whole economic pie became larger, that is not enough to solve the problem.

Only spending cuts can do it, and those can only be accomplished on the needed scale by reducing the size of our government (meaning reducing federal employment and eliminating agencies) AND by working out ways to reduce the cost of both social programs and national defense. Not one or the other – both. A diet is never pleasant. Cutting back on personal spending is always uncomfortable. Cutting back on our national spending is going to hurt a lot. And frankly, if it isn’t done in such a way that EVERYBODY hurts, it will not have been done right.