Fix the debt

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With the big fight behind them, it’s time for the leaders in Washington to sit down and get to work in order to prevent another confrontation in January. Haha! I know, it’s always best to open with a joke, so I hope you liked that one.

Well, if you’re like most people this isn’t a joke at all. The Federal budget deficit is serious business and one of the most pressing problems facing this nation. There are a lot of myths being repeated, however, and many people will be surprised to learn that the deficit was reduced dramatically in 2013. With some growth happening it’s down to just 4% of the economy – from a high of nearly 10% in 2008. But it’s still critical to get a handle on things before the median Baby Boomers start retiring in 2017 if we’re going to realize a new era of growth.

Ready to get serious?

First of all, we have to conquer the myths about the debt and the deficit (the amount we add to the debt every year). The total debt outstanding is $16.7 Trillion, which is about the same as the total Gross Domestic Product (GDP). However, only 73% of that is held outside of the government (aka the Social Security Trust Fund) and Federal Reserve. These are all big numbers no matter how you look at it, but it could be much worse.

It’s often repeated that Obama “doubled the national Debt”. In reality, budgets passed before he became President total $11.4T of debt and $5.3T were added during this administration. Remember that if you hear this popular myth.

The deficit, or amount we add to it each year, is $642 Billion right now. It’s a lot better than the $1.4T we were adding, but there is room for improvement – and, in fact, it could be eliminated by 2016 without a tremendous amount of pain. That’s if we get serious about it and follow the advice of a fun website called fixthedebt.org.

This is the public side of the Simpson-Bowles team that hasn’t exactly given up on lobbying Congress for real reform – but they are turning their attention to ordinary people to build support. They even have a handy Excel-based tool where you can design your own budget balancing plan. It’s a handy exercise for understanding a bit more about what the deficit is and how we can reduce it.

Give the progress we’ve made, why bother? Two reasons. For one, it’s a lot easier now than it was in 2009 to balance the budget. But the most important reason is that deficits would start to rise again once Boomers start to retire through the next 10 years if we do nothing. A lot of that comes from rising Medicare costs, but slow growth is currently forecast through that period. Fixing the deficit now is not only easier, it also frees up capital for a new generation that is poised to take over when jobs become available through retirement.

That’s one of the 3 great forces weighing on us right now, and getting this right does make it more likely that we’ll realize a great golden age when the next generation takes over. It’s the least we can do for them given that we’re handing them all this debt in the first place.

But that’s the thing with the debt – we’ve been in a situation like this before. At the end of WWII the total debt was 120% of GDP. How did we get through that? Debt is something that is best handled by balancing the budget (not adding to debt) and then positioning the nation to grow our way out of it, as we did in the 1950s. Everything looks better in a growing economy, and the 2020s will be no different if we do it right.

So, how would you balance the budget? It’s entirely possible that we can eliminate it by 2016, and we definitely should try. While it doesn’t seem likely that Washington will do anything about it, it’s worth noting that for all the fighting in 2013 a lot of progress was made – if clumsily. A little more careful thought could end this year with real solid progress towards setting things up for the next generation.

If you talk to the kids about it, they’ll tell you it’s no joke. It’s best that we all get serious about it, too.

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