The first part of this two part blog explored how our spending habits as individuals play a big part in the growth of the federal debt. This second installment will explore more of the technical reasons of how it has occurred, and end with some ways that we can begin to better manage it.
First, allow me to explain two things this blog won't do. Firstly, it won't attempt (at least knowingly) to manipulate statistics to prove a point that's consistent with my agenda. There are three kinds of lies: Lies, damned lies and statistics, and it's my intention to prevent lies from tainting any facts that I share in this blog.
Secondly, it won't attempt to turn this into a political issue, at least not republican versus democrat. Some people spend a lot of time trying to point the finger of blame from one party to the other. It reminds me of the Dr. Seuss story of the Sneetches. Many people may not know this story, which usually is meant to teach about prejudice, but I think is also a good way of thinking about dyed-in-the-wool Republicans and Democrats. You can see a brief recap of the story here.
As you'll see later on, neither major political party in the United States can point a finger of blame. Both parties have succumb to the siren call of power that comes with spending huge sums of money, and it really makes one wonder whether change can really happen within the present two party system. But perhaps we'll leave that for another blog.
So what does Franklin Delano Roosevelt have to do with today's almost $15 trillion federal government debt? Here's where the facts come in.
The first federal debt was recorded on January 1, 1791, during George Washington's first presidency, and it was just over $75 million - not bad for starting a country! Washington became president in 1789. A presidential election occurs every 4 years, so let's spend a moment looking at what's happened to the debt in those 4 year cycles.
In the first 144 years (or 26 cycles of presidential elections), our country went through a period of nation building, land acquisition, civil war, foreign war, health epidemics and economic depressions. During that period, our debt as measured at the end of a 4 year presidential cycle:
- Increased 17 times
- Decreased 19 times
- by June 30, 1933, the debt was under $23 billion. $18 billion of that increase came during the years of World War I.
- While seemingly a large increase, as the debt was now about 306 times larger than in 1791, it only represented an increase of approximately $160 million per year each year.
- If the debt had continued to increase at that rate, it would now be about $35 billion. Of course, it's slightly larger than that!
The other key thing to note is that the number of times the debt increased was fewer than the number that it decreased - it was cyclical, and for the most part, fairly balanced.
From 1933 to 2013 (yes, it's safe to predict what's going to happen in the next 18 months), the debt:
- Increased 19 times during the 4-year cycles we're looking at
- Only decreased once (after the end of WW II).
- The debt increased an average of $187 billion per year - a huge increase.
Something happened 80 years ago that led the government to believe it was OK to always spend more than it collected. What happened? Is it even legal for the government to borrow money (or spend more than it collects in revenue)? The short answer is yes. Article 1 Section 8 of the Constitution allows congress to borrow money. It also authorizes Congress to spend money it collects and borrows to "provide for the common Defence and General Welfare of the United States". And that's where the problem lies...
What constitutes the "General Welfare" of the United States? That simple question has no simple answer, and even two prominent authors of the constitution (Madison and Hamilton) disagreed on the interpretation. Of course I have an opinion, but my opinion doesn't count for much. Unclear constitutional issues require clarification through constitutional amendment, and that's one of the solutions our country needs to pursue in order to get our national debt under control.
What is clear is that up until about 1936, the Federal Government took a fairly narrow view of what General Welfare meant, and the Supreme Court was fairly consistent in its support of that definition. In the 1930's, a number of programs were introduced (National Industrial Recovery Act, Agricultural crop payments, Social Security) by FDR, and quickly met challenges that rose to the Supreme Court. Because the Court took a fairly narrow view of what "General Welfare" meant, it ruled against the programs. FDR had enough, and threatened to stack the court with justices that would deliver his brand of justice. His justification, as quoted from his second Inaugural address in January 1937:
"I see one-third of a nation ill-housed, ill-clad, ill-nourished.''
By May of that same year, the court reversed its view on General Welfare, perhaps as an act of self-preservation, and in what is now called the "Switch in time that saved nine", judged in favor of two "New Deal" cornerstones - unemployment tax, and old age benefits as part of Social Security.
Those decisions launched the seemingly unstoppable juggernaut of federal spending and the growth of the federal government, as well as the creation of numerous entitlement programs. No presidency since then has taken any meaningful steps to either rein in federal spending, limit deficit spending, or more completely define what General Welfare means. Without a clear definition of that single term, any future government could find a way to justify almost any action.
The other key point to remember is that any power given to the Federal Government means that it is taken from the local state government. Our country was founded as a Republic of United States, giving all power to the states, except those powers enumerated to the Federal Government. What has happened over the past 80 years is that the power and importance of the individual states has been compromised in favor of consolidating power into a centralized government.
Isn't that what the Revolution sought to correct in 1776?
Before concluding with a couple of steps to resolve the issue, let's quickly examine whether the last 80 years has seen improvement on the issues Roosevelt saw as a threat to the country (ill-housed, ill-clad, ill-nourished). After 80 years of ever expanding federal government control and spending, we would expect to see some pretty amazing results:
- Unemployment is at it's highest level since 1948, with almost 10% of the workforce looking for work.
- Foreclosure rates are at an all time high, and have been on the increase for decades. Almost 1 million homes have been foreclosed on this year
- There are almost 48 million people receiving food stamps (US Debt Clock)
- 66 million people receive Social Security retirement &/or disability benefits (US Debt Clock).
- There are over 20 million government employees at the federal, state and local levels. That's about 15% of the total work force (US Debt Clock).
- The average American household’s credit card debt in 1990 was $2,966. In 2007 it was $9,840.
- In the late 1950's, the poverty rate was 22.4%. In 2009, the rate was 14.3%. In spite of how bad our economy is doing, poverty is nowhere near what it used to be. The poor are definitely less poor.
There's an old saying: "Give a man a fish and you feed him for a day. Teach a man to fish, and you feed him for a lifetime".
I'm concerned that more and more people are relying on the government to get fish. Poverty has decreased, but how is that possible when so many other metrics are out of whack? I think we've taken the notion of general welfare way too far when such a high percentage of the population RELIES on getting money from the government. What would the poverty rate really be if it weren't for ever-increasing government expenditures on entitlements?
That's the key word, that we heard so often in the debt ceiling crisis - entitlements. Should entitlement spending be cut? Here's a better question. Who says anyone is entitled to anything in the way of money FROM the government. As citizens, we are entitled to certain rights, freedoms and liberties, but I certainly don't think that I'm ENTITLED to any of your (or your kids) tax money. The fact that we use the term so often and without convulsion is a true sign of our system illness.
All right, time to wrap this up. What can we do to fix the problem. Here's 2 steps:
- Make it illegal for the federal government to spend more than it earns, except under dire circumstances. Since the clowns in Washington can't be trusted to define dire, such over spending would require a majority vote in a national referendum.
- The term General Welfare needs to be defined in the constitution, by way of an amendment. We've seen what 80 years of letting politicians decide what is best for us has accomplished. It's time to reign them in.
Both these solutions would require years to implement since constitutional amendments are required, but the time to start holding our elected officials feet to the fire is now! At a minimum, if someone seeking office will not stand up and say that they'll work towards a balanced budget amendment, they don't deserve your vote, and they certainly don't deserve the right to spend your current and future tax dollars.
We can't continue to spend more than we earn, either as individuals or as a country. It's simply common sense.
Tune in to almost any news commentary show these days, and at some point in the program, you're likely to hear talking heads going on and on about who is to blame for the hemorrhaging federal debt.
One group says that Bush more than doubled the debt left by all the presidents before him, so he's to blame. Another group says that Obama is the most reckless spender every to occupy the office of President, and his goal is to create a European Social Welfare state. So what's the truth? Who's to blame?
You are. Oh, and Franklin Delano Roosevelt. Bush and Obama are simply following the lead, but more on that later.
OK, first a word of warning. In order to talk sensibly about this, there needs to be a little math thrown in. Most of us get annoyed (and a little freaked out) when we see either really huge numbers (is that billions or trillions) and decimal points, so to simplify things, I'm going to use round numbers. Don't rely on my numbers being absolutely accurate - if you're that interested, you can do the research yourself, but I assure you that the numbers are close to being accurate.
Also, many of the numbers and definitions used can be found on the website US Debt Clock.
Finally, to try and bring some context into the discussion, I'll be drawing parallels to our personal financial experiences. While it's overly simplistic to compare a country to an individual or a family, the fundamental principals aren't all that different.
When you think about finances of a country, one of the most important numbers to understand is the Gross Domestic Product (GDP). For most of us who work and earn a salary, the GDP should be easy to understand. It represents the value of the goods and services produced within the US per year, just like your salary represents the value of the service you provide to your employer in a year. In August 2011, that number is close to $15 trillion. In other words, we as a really big family earn about $15 trillion a year.
So let's come to understand the first part of the blame game, and that is that you're really the one responsible for the mess the federal government is in.
Huh? I didn't tell Obama to create a health care entitlement we can't pay for. I didn't tell Bush to fight wars against third world dictators. Why is it my fault?
Imagine:
- You have a job where you earn $48 thousand per year (GDP).
- You owe $176 thousand (US Total Debt)
- You have to pay almost $12 thousand of interest every year in order to pay that debt? 25% of your pay is going just to interest! (US Total Interest)
- The total value of everything you own (house, cars, jewelry, savings, retirement plan, stocks) is $244 thousand. (Total National Assets)
- You have kids that you have to pay for when they go to university and get married, and you're also going to need to have money for when you retire. That future obligation that you haven't saved for is $370 thousand. (US Unfunded Liabilities)
How can you possibly pay for all your obligations on your income? You're not drowning yet, but you can see the water rising.
Keep in mind, these numbers have little to do with the Federal Government and taxation. They have to do with how we as citizens earn and spend our money. The comments in brackets show the equivalent categories on a national level, as found on the US debt clock, divided among all the population of the US.
This is basically where we're at in the US, and we're in bad shape!
As individuals, we borrow a lot of money to buy expensive homes and cars, and we save very little. This year, over 1 million people will lose their homes to foreclosures. We have a lot of future expenses that we haven't even begun to save for, like education, weddings, retirement, and our health. We set a very poor example for our government to follow. In fact, if the government tried to do the opposite, we would probably rise in revolt. We borrow today in the hopes that we'll earn more or invest better tomorrow, but as we've seen lately, that doesn't always happen. And if it doesn't happen, many of us secretly hope that the government will be there to bail us out. If we're not responsible enough to look after ourselves during good times, why do we expect that someone will look after us during the bad times?
The National debt is really just a mirror of what's going on in our personal lives. The Federal government has borrowed almost $15 trillion dollars, because it has been paid less than it has spent. That's $47 thousand per each person in the country. Just this year, the government will spend about 164% of what it collects. We've set a bad example for our government. So what's the first step to fix the problem?
Personal Responsibility.
As individuals, we need to get our financial house in order. We need to spend less, save more, and live within our means. It's a little hypocritical to expect our government to act one way, if we each act the opposite way. The beginning of the solution starts with us.
It's up to us to save for the future. The average American citizen has $1,800 in savings (liquid assets, like bank balances). That's two weeks salary. If we were committed to saving 10% of every dollar we make, we would triple the amount of savings we had by the end of the first year. Another way of saying that is that we only allow ourselves to spend 90% of what we earn. In other words, we commit that we will each spend less than what we earn, and put the difference into savings.
We don't have a problem that we don't earn enough, we have a problem that we spend too much, and that we don't save enough. We're a nation of too many grasshoppers and too few ants.
It's no wonder, then, that the government has the same problem we do. Once we start saving and spending less than we earn, we begin to hold ourselves more accountable for our own financial future, and once we do that, we begin to expect the same of others, including the government. We don't expect anyone to bail us out if our poor decisions get us into trouble, and we therefore begin to look less favorably on spending government revenues on bailing out large banks and corporations, or on giving food stamps to 47 million people.
Let me wrap up part 1 by confessing that I lived most of my life as a grasshopper. I always believed that I would have ever increasing earnings (at least until I got really old), and so that if I spent more today, I would earn more tomorrow to pay it. I remember talking with a friend of mine once, who happened to be a minister. He asked if I had a budget. I kind of snickered, and said I really didn't have one, and didn't think I needed one, because if I found that I didn't have enough money, I would just earn some more. I wasn't a teenager when I said this - I was in my mid 30's. Things were going well for me, but I wasn't saving, and planning for the future, I was purely living for the day.
I'm different now. There's a saying "Too soon old, too old smart", and that's true for me. I live much more simply now than I did, earn a lot less, but I also owe a lot less, and should be debt free (except for a house mortgage, which is about 1.5 times our family income) within the next 12-18 months. My kids did not inherit my grasshopper genes, and I'm thankful that they are much more disciplined about money than I ever was.
It's up to each of us to do what we can so that we can be financially independent, and not look for big brother or government to bail us out. The fact is, though, that many people expect the government to help them when they get into trouble. After all, the government can simply take some of the money from the people who did plan and save, and give it to those who have a greater need. When did that start and is that something that our constitution even allows for?
Well, that's where FDR fits into this picture, and that's the second part of this story.
With the advent of a free press and especially the Internet, countries which constitutionally protect Free Speech are actually best poised to have smaller governments, and are able to shift the responsibility for much of the protection provided by the state, to the people, where it belongs.
Think, for a moment, how many laws we have in the US. The federal government has laws, knows as the US Code. Agencies can pass laws, known as CFRs (Code of Federal Regulation). Every state has it's laws, and every county and local government has it's laws.
For the purposes of this blog, I'm going to ignore a certain class of stupid laws on the books. We all know the ones I'm talking about, as we probably see them from time to time on the Internet, or learned about them in a public school law or civics class. They're the laws that say it's illegal to drive in a car with an uncaged bear, or require all homeowners to own a rake, or stupid stuff like that. Though good for a laugh because they make you scratch your head and wonder aloud "what were those silly politicians thinking when they passed this", I'm not going to focus any further on those relatively few laws.
Ask a knowledgeable person the following question: "How many laws are there in the US?" If the person is really smart, they'll give you the one right answer, and that is that nobody knows!
Let's imagine for a moment, that we could collect all the laws in book form, and the imagine all these laws in books on a shelf! Just the US Code, and the CFRs in bound volumes occupy over 375 inches of shelf space. That's over 30 feet of shelf, just for federal laws and regulations. Compare that to the picture below:
What has happened? Have we lost our minds? Have we become a nation of water-heads that needs the protection and guidance of a benevolent big brother at every turn? Are we really any better off for all these laws, and the requisite policing and enforcement that comes with them? What freedoms and liberties have we sacrificed by allowing ourselves to be so "ruled"?
I think this is where the Fifth Estate can play an important part. First, a quick definition. The Fifth Estate is actually an undefined, though oft-used term, and is generally considered to be all that which is not comprised of the other 4 Estates, namely:
- Clergy is the First Estate
- The nobility is the Second Estate
- The commoners are known as the Third Estate
- The press is the fourth estate
In today's common use, the Fifth Estate is often thought of as the blogosphere and networked individuals. If you're reading this, you could be part of the Fifth Estate!
So what does the Fifth Estate have to do with reducing the number of laws? Think about all the laws that companies have to follow. Labor laws, environmental laws, safety laws, trade laws, competitive laws, export laws, import laws, tax laws, etc. Laws governing companies and business are so numerous that they add extra cost to the products sold or services delivered by those companies. But what's the alternative? The most effective law, in a free enterprise and capital-driven society, is the law of competition, but how could that be best leveraged?
Let's look at a few examples. Consider a restaurant. Government health inspectors visit the restaurant on an infrequent but regular basis to make sure that the restaurant is safe and sanitary. Is this really something the government needs to do? Let's say that there were no more health inspectors. The local International House of Schwarma decide they want to save money, and turn the heat lamps down low, serving tepid schwarma to their clientele. Dairy products are also left out on the counter, and the high school kid who runs the fryer doesn't wash his hands after going to the bathroom. A couple of weeks later, someone gets sick and thinks it's from their visit to the IHOS. A week later 5 more people get sick. In today's day and age of social networking sites and Internet, how long would it take to get the message out that the local Schwarmary is substandard? Business would drop off very quickly, and the head of the IHOS would have to clean up their act quickly, or go out of business.
Now, let's think of a manufacturer. Imagine that we didn't have all the reams of anti-pollution laws that are on the books. How could we be protected from a manufacturer who decides to dump their waste into our environment? Competition and information is the answer. If a number of people take exception to what that producer is doing, then fewer people will buy their products.
Of course the fly in the ointment here is that taking big brother out of the equation means that we all need to be more responsible consumers. More organizations, like Consumer Reports, ePinions, Angies list, and sites like that could spring up. The value to these sites is that real people can contribute to them, and that businesses would have a chance to respond to both the boquets and the brickbats.
Just like on web searches, some companies and websites show up because they pay to be there. Sites that charge for either users to contribute their feedback, or companies to respond, or place higher on satisfaction scales, are worthless sites, and should be sent truckloads of tainted schwarma.
My point is that we need to find ways to limit laws and government involvement, in favor of competition and disclosure. Now that we all have the tools of free public speech delivered in a timely fashion, we have an unprecedented opportunity to take more responsibility as individuals. The voice of the individual is more powerful than ever before. One only need look to the world events in places like Egypt and Iran over the past year to see how true that is.
Even with all the laws, companies still sell tainted food, and companies still pollute, so it's not like we'd be throwing caution to the wind - we'd just be changing the ultimate punishment. Rather than a fine that goes to the government, the penalty to the offending company would be the ultimate price - no customers.
Critics will say that it's too easy to "plant" a lie about a company, or to exaggerate about a problem, thus unfairly impacting a company's business. The solution is to allow companies to respond and defend themselves. Recently, we traveled to a city, and looked for a hotel using one of the popular travel sites that gives reviews. We quickly narrowed our search down to one particular hotel, and read a selection of the best and worst reviews as well as some in the middle of the road. What impressed us the most was the number of positive reviews as compared to the negative. The next most impressive factor was that the General Manager took the time to respond individually to criticisms. Had the person complaining taken the time to raise the issue at the time of their stay, it seemed clear that the GM probably would have solved the issue. We booked our stay, and were very pleased.
Our freedom of speech is a tremendous liberty that we abuse because so many fail to exercise it for the common good.
Of course we could allow the government to look for more ways to control everything in our lives, while we relinquish more of our freedoms. Stories like this, about some girls and their lemonade stand, would become more the norm, the government would grow larger, lawyers would become better paid and more abundant, and our economy could further stagnate because we've just made things so dang complicated.
We don't need to be protected by some authority that could just as quickly turn against us. We need to take the responsibility that comes with our freedoms, and take charge. It is supposed to be a Government of the people, by the people and for the people, not a Government over the people.
It's just common sense.
OK, if you answer a phone at a business with more than just a few people working there, tell me this hasn't happened to you...
Ring, ring, ring... You pick up...
(You) "Hello, thanks for calling Willy's Widgets, this is Pat, may I help you?"
(Anna) "Yea, did someone call me from this number?"
(You) "I'm sorry ma'am, you've called a business line with lots of people who could have called. Do you do any business with Willy's Widgets? Perhaps I could direct your call?"
(Anna) "Never heard of you. My name is Anna C Folic. Someone called me from your number. Why did you call me?"
(You) "I'm sorry Ms. Folic, but I have no idea who might have called. Perhaps they left a message on your phone?"
(Anna) "I don't know how to get my messages. Anyway, somebody called me from your number. If you don't tell me who, I'll report you to the FCC for illegal phone calls. I'm on the Do Not Call List!"
(You) "I'm sorry ma'am. I can't do anything further for you. Perhaps if it's important, they'll call back"
In some cases, the pointless conversation winds on aimlessly for another few exchanges, but in almost all cases, the person on the other end of the phone still doesn't quite get it.
Are people really so wrapped up with themselves that they think everything is about them, and can't understand that when you call a business, it's going to be nearly impossible to find the person who called you if you don't have a name? If they don't have enough sense to be able to figure out how to use voice mail, or figure out that if nobody left a voice mail, it can't be that important, then I think their phone privileges should be taken away!
I'll bet a lot of those people also believe in Intersection Fairies.
Just another brief example of how everyday common sense isn't nearly common enough!
The Sneetches
