If The U.S. Was A Real Household - Investopedia.com

If The U.S. Was A Real Household

Posted: February 9, 2012 9:47AM by Stephen D. Simpson, CFA

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Filed Under: Debt, Economy

There's no question that discussions about the deficit and debt dominate coverage of the United States federal government - especially during an election cycle. It's easy to get overwhelmed by the numbers to the point where they become simple abstractions. Let us consider, then, what the fiscal state of the U.S. looks like in terms of numbers that are a bit more relatable to everyday experience.

SEE: Successful Ways That Governments Reduce Federal Debt

The Bare Numbers
I recently saw a picture sent around Facebook that portrayed U.S. government finances in a simplified form that dropped eight zeros from the numbers. Do that for the 2012 budget that Obama proposed and you get the following:

Income - $26,270
Expenses - $37,290

That means that the U.S. has to borrow $11,020 (or almost half of its income) to pay its bills.

Unfortunately, Uncle Sam has been hitting the credit card pretty hard in recent years. On a "household basis," the United States debt stood at about $135,620 dollars at the end of 2010 and has since risen to about $143,000.

Those budget cuts that Congress was so happy to brag about? They're worth about $385.

Where Does the Money Go?
The first thing that any budget counselor would do is assess the client's spending habits and see where there may be fat to trim from the budget. Unfortunately, the United States is rather stuck when it comes to nearly half of its budget.

Our national household will be spending about $2,420 in interest in 2011, along with $7,610 in Social Security and $7,540 in healthcare (Medicare/Medicaid). While any (or all) of these items could be adjusted, there would be a terrific fight in Congress over how to restructure that spending and any talk of "restructuring" the U.S. debt would be a very real risk to the credit rating and interest rates of the U.S.

Moving on, the numbers don't get much better. The single largest controllable (or discretionary) item on the budget is defense, coming in at about $5,500. Behind this is an accounting euphemism called "Overseas Contingency Operations" that basically means the ongoing war on terror. The expected bill here? Another $1,200.

Beyond this, there really isn't much that makes a large difference. Health and human services gets about $800, education $774, and the whole "discretionary" budget (including defense) amounts to $13,400. Stop and consider the magnitude of these numbers; the entire federal discretionary budget could be zeroed out and the U.S. would only be in the black by about $2,400. At that rate, the U.S. debt would never be repaid.

Actually, it's even worse than that. Social Security and Medicare expenses are going to rise with the aging population, and rise at a rate that outstrips tax receipts (unless tax rates go up). On top of that, the U.S. infrastructure is crumbling and various engineering groups have estimated that the government must spend $2,000 a year for 10 years to bring it back up to scratch.

Are There Any Solutions?
In some respects the federal government is lucky that it does not have to operate like a household. The U.S. national debt may be too high, but it does not have to be completely paid off (and a great number of economists would argue that it shouldn't be). Still, the near-term options for dealing with this mess are limited.

Whenever a budget is out of balance, ways of cutting spending and increasing earnings must both be considered. Can the U.S. government cut spending? Cutting interest payments is a virtual non-starter, especially given the low rates already enjoyed by the U.S. Medicare and Social Security could both be modified; charging premiums for wealthier Medicare recipients or extending the age of eligibility for full Social Security benefits would certainly help, but would be a political fireball.

Beyond that, cutting spending may get too difficult for most Americans to accept. One option would be to cut defense and anti-terrorism spending in half and take 20% of every other discretionary program. The result? About $5,000 in savings, which actually isn't too bad, if Americans can live with the ramifications.

On the earnings side, there aren't too many new revenue sources to exploit. Items like excise tax are a small part of income ($1,030) and likely cannot be increased enough to matter. Likewise, solutions like opening new areas to energy exploration just won't matter; the U.S. collects $9 a year in oil and gas royalties and even quintupling it wouldn't help much. 

However, there may be solutions in simply tweaking what is already on the books. There are few firm numbers out there about the ramifications of eliminating the earnings cap on Social Security, but numbers from the Social Security Administration and American Enterprise Institute suggest $1,500 a year in potential income from this move. Unfortunately, we're still coming up short of breakeven. That suggests that one of the least desirable options, higher taxes for everybody, is pretty much a certainty at some point. Buy now, pay later indeed.

The Bottom Line
The surest way to guarantee failure is to call a problem "un-fixable" and just quit. The U.S. fiscal situation is indeed serious, but not beyond repair. Tax revenue should increase as the economy improves and there seems to be more willingness from the public to see a smaller government that spends less.

Still, no one should fool themselves into thinking that this will be easy. Every sector and group in the economy will have to pay a share: defense, senior citizens, research scientists, wealthy workers and not-so-wealthy workers. The good news is that the U.S. can in fact get its household into order, and perhaps the first step is reducing the numbers to a level we all understand.  

via financialedge.investopedia.com