The Financial Dilemma America Faces That No One is Willing to Solve – Let’s Do Some Math

Here are some numbers to consider that are mind boggling. It is important that you are aware of these numbers:

• Our government borrows roughly 40 cents of every dollar it spends (Politifact)
• In 2012 the government will take in about $2.17 trillion in tax revenue and spend $3.82 trillion – the difference is roughly 43%. That 43%  is the deficit for that year. So put in smaller terms, of every dollar we spend, we have to borrow between 39-43 cents to spend it.
• Last November I posted this article (Eye Popping numbers Regarding our National Debt) that lays out how much we owe (now $16 trillion, how fast it has grown (nearly doubled in 3 years) and how much interest we pay on that debt annually – nearly half a trillion dollars in interest ANNUALLY! Agh!

Any of you who have ever made a budget know there are two ways to cut your debt. You have to either make more money (raise taxes) or cut your spending. Let’s say we cut 50% of our spending (from 3.82 trillion that would get us down to $1.91 trillion in government spending)…if we maintained our current tax revenues ($2.17) that is a surplus of $200 billion. Remember, the interest in our debt alone is just under $500 billion per year because even though we would be starting to pay it back we are still trying to pay off $16 trillion at $200 billion/year while the interest is $500 billion. That is like the interest on your credit card being $500/year and you are only going to pay $200 per year on it. Is your debt going to go down? Nope. That means we either have to make further cuts (basically impossible beyond the 50% haircut outlined above) or else use the other tool at the disposal, raise taxes to cover the $300 billion in interest we would be short each year. So let’s say you raise taxes by $1 trillion annually. Crazy…but let’s throw it out there. After the $300 billion in interest annually is covered, we would have $700 billion left over to pay on the debt. Let’s do the math $16 trillion/$700 billion = 23 years to pay off our debt.

That result is only based on these assumptions mentioned above:

• 50% spending cut of all federal spending (have you ever seen the government cut any spending? Never going to happen)
• Increase taxes $1 trillion (close loopholes, raise rates, etc)
• 23 years to pay it back = the year 2035

We have to dig out of this hole and if we don’t start digging we aren’t going to make it. Additionally, someone has to make these tough decisions and no one wants to do it because both sides of the aisle or more interested in re-election and maintaining their power and influence than they are actually solving problems. This is very disturbing and it is time we get people in office across the board who will get something done.

The solution is also poisonous
Finally, here is the scary kicker. For the government to meet the above assumptions about cuts and tax raises would almost certainly tip us back into recession. The government makes up a decent percentage of our economy because as the government spends business here and abroad are the recipients of that money for their services. I haven’t been able to track down that number (this site says 28% but I don’t think it is that high). Our economy is growing at 2-3% per year right now but without the government spending that number would go negative (equals recession). So if you don’t cut anything and keep going like we are, our debt goes crazy and even the interest will be crushing (not to mention paying back a dime) and if we try to solve it our economy will go in the tank as it is relying on all that government spending and stimulus to stay on a level footing and not dip back into recession or depression. So who wants to pull the trigger?

Have a read of this article from the Washington Post today that says when governments start raising taxes and cutting spending, the damage done is even worse than they thought – IMF: Austerity is much worse for the economy than we thought

Here is an excerpt that has to do with what has been stated above, “Recent efforts among wealthy countries to shrink their deficits — through tax hikes and spending cuts — have been causing far more economic damage than experts had assumed.”

Last – remember, there are more ways to raise revenues than increase tax rates (which Jerry mentioned in the comments that even that can be counterproductive). If you can give businesses room to grow they will produce more tax revenue but we have been regulating them more than ever and being unpredictable with what the governments next  big move will be (think health care, stimulus, fiscal cliff…etc).