It's Time to Cut Our National Budget

You might not guess it judging by the riots, the chaos, and the general unhappiness swarming the nation, but I look at the situation in Greece with a distressing mixture of both pity and full-blown envy. Pity, because the Greek people are in the middle of adjusting to a new economic reality that brings with it much physical and emotional pain in the short term. Envy, because I know that over the long term, the country has made the right decision, whereas we in the U.S. have not. What Greece has just done, we should be doing ourselves, or planning to do soon. For a variety of bad reasons, however, we cannot and probably will not make similar choices. It just might crush us in the end.

Lessons from high school
When I was a freshman in high school, I had an English teacher who took pleasure in randomly calling on students to recite various classical themes by memory in front of the whole class. Cruel, but highly effective, I remember a lot from that class, including Aristotle's definition of the term tragedy.

According to the ancient philosopher (and my own imperfect memory), a tragedy is the story of a better-than-average man that, because of a grave error in judgment, falls from a high place in life to a very low one. Witnessing this terrible development of events, the audience is expected to experience two principle emotions: pity, because they feel bad for the man whose luck has changed, and fear, because they realize that this same fate could easily befall themselves. The irony, of course, is quite clearly at hand.

Aristotle was right
Today, we stand on our distant shores observing the Greek tragedy, counting ourselves lucky because of the relative stability that still pervades our institutions, our currency, and our streets. But the emotion we should really be feeling at this moment is fear. You see, starting from the very day budget cuts were authorized, Greece took its first steps in the right direction, steps that involve curtailing vast entitlement programs and reining in massive budgetary shortfalls, steps that the U.S. knows are necessary, but has and will continue to put off for as long as is humanly possible. This is why I am envious, and this is why we should all be scared.

Not unlike leaders in other parts of the world, leaders in the U.S. are a short-sighted bunch, much more concerned with being reelected than actually making good decisions. Consistent as most politicians are in the department, my guess is that our leadership will not be taking a hint from the Greeks. We will not bite our collective lips, do what's best for the country, and take a machete to our national budget. Still unaware that carrying massive financial obligations over sustained periods of time creates bad things, our politicians prefer to bury their heads in the sand and maintain the status quo, because that's what the public supposedly wants. What our leaders fail to consider is that the status quo as it stands today cannot be held into infinity. Believing that it can is naivety at best and dreadful maliciousness at worst.

It's on us
It is important to note that Greek politicians deserve little admiration in this situation. Rather than pursue these measures proactively, the Greeks have had great measures of austerity thrust upon them by a larger monetary force that offered no realistic alternative. But, once again, I am actually somewhat envious of their situation.

The European Union's strong-arm tactics actually made the difficult, but necessary, process of cutting the Greek national budget quite a bit more palatable for the officials involved. Rather than accuse each other of bloody murder, Greek politicians can save face and forever pass the blame onto those greedy Germans. This is an advantage that Americans do not have. With our super-power role in the world and the dollar's status as the globe's currency of choice, the buck, so to speak, starts and stops here. No one will force us to make these changes.

Ironically, because of our vast strength, our nation's blindness may last until the very day that there's no more demand left for yet another T-bill or another cent of our ever-expanding debt. Only then will we see just how far we've come, after all faith in the system has already been lost. The question I ask is this: Why on earth would we not want to make these decisions on our own terms rather than at the mercy of unhappy creditors who may be eagerly anticipating such a moment of weakness?

Make the tough decision
I come at this argument not from the perspective of a politician on a pulpit or an economist with an axe to grind, but merely as an investor who studies balance sheets with great intent. What I know is that we are currently spending at rates that are unsustainable. Our deficits are large and increasing. Our national debt is expanding at a rate that is historically death-defying. Our entitlement programs are dangerously underfunded even as the strain upon them grows. We have a bad problem, and we're just making it worse.

Let me say also that I am not some far-flung Austrian economist, prophesying doom, seizing up bags of grain and bars of gold. Some level of debt is a good thing, especially for a country with so much relative strength. But, there are limits to such a system. There is a point at which the system breaks. The time has come to at least begin to address the issues that will eventually cripple this country. Once a system like ours, one that is based on the full faith and credit of the government, is broken, it is not easily repaired, if at all.

The Foolish bottom line
What we need is our own great measures of austerity. We need them today. In order to properly structure this nation for future success, we need to make a few tough decisions now. Unhappy as this may make the greater public and those seeking reelection in November, I crave it. Like Greece and many other nations out there, it's time to bite the bullet. With a projected national deficit this year of $1.5 trillion and an existing debt of $13 trillion, the time is now.

Fool Nick Kapur still can recite the first eight lines of The Odyssey in ancient Greek from Ms. Denize's freshman English seminar by memory. The Fool has a disclosure policy.


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  • Report this Comment On May 28, 2010, at 1:40 PM, DaMofo wrote:

    Thank you for your rational argument. Thank you for not making this a wedge issue, but instead a collective one that every American should wake up and face the tough reality that we need to do a 180 from where we are headed. No one wants it but we need to pay more taxes AND cut spending but for the sole purpose of paying down our debt. Interest on our debt is over 1 billion a day. It's hard to put that number into perspective, but it real and we all have to realize that we are on this runaway train together. It's not going to be easy or fun, but we have to stop it before it's too late. Thank you again Mr. Kapur for bringing up a subject that everyone wants to hide in a closet.

  • Report this Comment On May 28, 2010, at 1:50 PM, DaMofo wrote:

    Thank you for your rational argument. Thank you for not making this a wedge issue, but instead a collective one that every American should wake up and face the tough reality that we need to do a 180 from where we are headed. No one wants it but we need to pay more taxes AND cut spending but for the sole purpose of paying down our debt. Interest on our debt is over 1 billion a day. It's hard to put that number into perspective, but it real and we all have to realize that we are on this runaway train together. It's not going to be easy or fun, but we have to stop it before it's too late. Thank you again Mr. Kapur for bringing up a subject that everyone wants to hide in a closet.

  • Report this Comment On May 28, 2010, at 7:59 PM, FutureMonkey wrote:

    In general I agree, but now is decidedly not the right time to tighten the budget or to increase revenue. In times of crisis deficit spending can be hugely beneficial. We are barely a quarter out of the most devestating economic recession. A combination of monetary policy, tax cuts, and increase spending has dramatically curtailed the recession and reduced the likelihood or depression that would rival the 1930's. Stopping that policies now, in the early fragile stages would return to that downward spiral. We can afford to borrow money at ridiculously low rates and are getting an excellent return on the dollar for most of that spending. After all, it isn't like we get no value from government spending - we get roads, schools, hospitals, libraries, police stations, fire stations, healthy citizens, educated citizens, employed citizens, safety, stability, and confidence where businesses can thrive and earn profits.

    We need to let the air out slowly, so that we can maintain prosperity while we earn our way back to balanced. If we institute aggressive austerity measures now, we would surely drive this economy over the cliff. Once we return to peace and prosperity we can return to the balance budget acheived during the 1990s

    Additionally, we are not like Greece in more ways than we are like Greece. They have a ludicrously low personal income tax and very very young retirement age. They also lack diversity of natural resouces and profitable businesses to ear their way back to health. We have many more opportunities and revenue streams than they do.

  • Report this Comment On May 28, 2010, at 8:15 PM, FutureMonkey wrote:

    Short verison of above.

    The time to build a rainy day fund is when the sun is shining not when the rain is coming down. Once the sky starts pouring, don't skimp on the umbrellas or we all get wet. Of course, after the sun starts shining again everybody will be in the mood for play not work.

    Maybe we should make Aesop's The Grasshopper and the Ant mandatory reading at every budget meeting of every board of directors and every government office. Come to think of it maybe we should start off every school day with the story, so we don't have to re-live this every generation or two.

  • Report this Comment On May 28, 2010, at 10:58 PM, ChrisBern wrote:

    Nick - thank you for writing this article, as it very eloquently summarizes my thoughts on the issue of federal budgets, debts, etc. I would say that the same goes for many states, as well. I live in California, and there is no doubt that some austerity is necessary (and ultimately mandatory, under balanced budget rules).

    @FutureMonkey - I, too, am concerned about WHEN to make the necessary cuts. However, I don't share the vision of peace, prosperity, and a balanced budget that you foresee. In fact, I would go so far to say that if we postpone austerity, and as you said eventually earned our way to prosperity, then our politicians would not choose to adopt spending cuts at that point because they would have a false sense of complacency from the very prosperity that would allow us to pare back our spending! Ultimately I agree with the author of the article that politicians are loathe to cut spending or raise taxes, and therefore we would actually be better off if someone could "force" them to make the tough decisions while saving face at the same time. Unfortunately I think it will take a major, major crisis before these types of tough choices are made, and I'm afraid at that point it will be too late.

  • Report this Comment On May 29, 2010, at 7:40 PM, neamakri wrote:

    Social Security: I have studied the available government census figures. Before the year 2010 there are about four workers for every retiree (age 65). Sometime after 2010, because the Baby Boomers will retire, the ratio will dramatically change to 3:1. This means that either those workers must contribute 33% more in taxes, or else the retirees must accept a 25% reduction in benefits in order to keep the same pay-as-you-go dollar ratio.

    The current SSA program has two major flaws. The FIRST FLAW is that the money is not "privatized" but instead is loaned to Uncle Sam at a low rate. Private busines is willing to pay more to borrow money. If you are good at math, you know that a small increase in returns, compounded over years, can make a big difference in the end. The SECOND FLAW is political control. As long as the government is in charge of your retirement money, they can do whatever they want with your retirement money, depending on how the political wind is blowing at the time. Would you rather have a congressman control your retirement money, or a financial professional?

    Let me discuss what are called "Tweaks". There are a variety of schemes to "save" social security. Some schemes are: raise taxes, tax more people, lower benefits, raise the retirement age, etc. ALL TWEAKS will either make workers pay more taxes or else reduce payments to retirees. Since Tweaks do not solve the TWO FLAWS, Tweaks are doomed to failure. We must privatize Social Security.

    Let me introduce Jose Pinera. He is from Chile. He was in charge of the Social Security system in Chile. In 1980 Chile converted to a privatized system. Since then the country of Chile has far less poverty than before, and their entire economic system has progressed more than twice as fast as before. It seems all we have to do is copy their success and be done.

    Please visit www.pensionreform.org. Click Jose Pinera. Select the article "Empowering Workers in Chile". He says it best.

  • Report this Comment On May 29, 2010, at 11:32 PM, FutureMonkey wrote:

    @neamakri. Good comments, unfortunately the big disconnect is thinking of Social Security as retirement savings or some sort of government pension. The program was not designed to be and has never been a retirement savings program. It is a social insurance program that we all pay into so that elderly folks, widows, and orphans without means to earn an income are kept out of poverty. As such, social security has been functioning perfectly as intended. 60% of retiree's would be living below the poverty line if not for social security checks. I for one am very happy that I'm not stumbling destitute American retirees, widows, and orphans every step. We are responsible for saving for our own retirement, social security is there to make sure that we don't starve or live in squalor at the end of our lives. That is all.

    Second point, most Americans are miserably inept at managing their retirement savings themselves and there are legions of sharks swimming with no compunctions about robbing their fellow man blind to support there own ferocious appetites. Privatization of something as essential as Social Security would put many Americans at risk for losing it all and ending up destitute.

  • Report this Comment On May 30, 2010, at 10:37 AM, negrodamus wrote:

    Sadly, no cuts or austerity measures are coming anytime soon. 2011 is pre-election year, which means it's time to throw the electronically printed bread to the masses. Maybe 2013...

  • Report this Comment On May 30, 2010, at 2:19 PM, plange01 wrote:

    its time to replace obama who clearly is not a president...

  • Report this Comment On June 01, 2010, at 8:19 AM, atpeace wrote:

    Medicare is far and away the biggest budget issue. Politicians want to give away free health care but are also unwilling to tax you at the rate needed to cover the costs. It's not just to current spending that's scary but the growth that's coming that is a train wreck waiting to happen. Politicians are unwilling to stand up to the retirement lobby and tell seniors the truth that they are putting their kids in financial chains. Bush's Medicare part D drug give away added about $60 Billion and growing to the tab. Medicare "death boards" are probably a coming reality at some point. We can't continue to spend $50k to extend the life of an 85 year old man by 3 month.

  • Report this Comment On June 01, 2010, at 11:59 AM, neamakri wrote:

    Thank you FutureMonkey. First, the link to Jose Pinera is broken so do this; go to Wikipedia and find Jose Pinera. Please read the whole thing.

    Next, you are very correct about the role of Social Security. I am only looking at how to save it before it is too late....before higher taxes and reduced benefits.

    Last, you say most Americans are inept at managing their retirements. True. However the plan by Jose Pinera creates retirement accounts similar to 401(k) whereby you have a limited number of choices. And there are a small number of providers who must compete among themselves for those retirement dollars (account owners can switch their providers). Thus the competition will eliminate the sharks.

  • Report this Comment On June 01, 2010, at 12:50 PM, BMFPitt wrote:

    Greece didn't "decide" to get spending under control, the market decided it for them. Then the US and the EU came along to enable them to spend recklessly for a bit longer.

  • Report this Comment On June 02, 2010, at 8:21 PM, mythshakr wrote:

    When will it happen for the US? When all those buyers of our national debt decide it's not as good or safe an investment as they do today. The question is; what will be the trigger? One of the "Greeks" (pun intended) passes some magic threshold? Political unrest... somewhere? Arizona invades Mexico?

    And would I prefer a politician, who is merely incompetent at managing my retirement or a "financial professional" like Goldman Sachs or BoA or Bernie Madoff... whose only interest is putting as much of it as possible in their pocket? I chose the incompetent politician.

  • Report this Comment On June 02, 2010, at 8:22 PM, mythshakr wrote:

    When will it happen for the US? When all those buyers of our national debt decide it's not as good or safe an investment as they do today. The question is; what will be the trigger? One of the "Greeks" (pun intended) passes some magic threshold? Political unrest... somewhere? Arizona invades Mexico?

    And would I prefer a politician, who is merely incompetent at managing my retirement or a "financial professional" like Goldman Sachs or BoA or Bernie Madoff... whose only interest is putting as much of it as possible in their pocket? I chose the incompetent politician.

  • Report this Comment On June 04, 2010, at 3:55 PM, DJDynamicNC wrote:

    Re: Social Security - it seems to me we can kill two birds with one stone here. If the problem is too high a ratio of retired folks to workers, why not simply increase the number of workers?

    And the easiest way to do that? Immigration. The vast majority of the world's population is very young. Opening up our borders - as we have done countless times before, and always to our benefit - neatly solves this issue, particularly when coupled with reforms such as extending the retirement age. My Millenial generation expects this sort of thing anyway, and we are willing to make the sacrifices necessary.

    For the same reason, we are just waiting for a leader to tell us that taxes will need to go up. That's a leader we can get behind - somebody mature enough to sit us down as a nation and do what must be done in terms of expenditure cuts and revenue increases.

    As for privatization of Social Security, well, you may trust Goldman Sachs to handle your money, but I sure as hell don't.

  • Report this Comment On June 04, 2010, at 3:58 PM, DJDynamicNC wrote:

    Finally, I must respectfully disagree that this is a non-partisan issue. By rights, it ought to be non-partisan. But we didn't arrive here in a vacuum. There is a clear responsibility to be borne for our current state of affairs. And while I'm not terribly interested in fixing the blame, I'm also not able to suspend my disbelief when those who screwed up tell me that they can fix the problem - using the same tactics that screwed it up in the first place.

    Being partisan and being right are not mutually exclusive.

  • Report this Comment On June 04, 2010, at 6:13 PM, mDuo13 wrote:

    @DJDynamicNC - I agree with your first comment in particular. There is still room in the US for immigration, and getting workers documented so that they pay taxes -- and are encouraged to stick around in the long term -- is a good idea.

    However, if you look at the problems we're about to face, Social Security is the most well-known, but it's the smallest dog in the pack. Medicare/Medicaid dwarfs it, especially in growth potential.

    I agree with the article author and a couple of the early commentors too: cuts need to be made, but human nature makes it hard to cut when things are good (which is really the best time to cut), and just as hard to cut when things are bad (because it's not a good time to cut). Either we need politicians who can buck the trend and make hard, probably unpopular decisions for the long-term benefit... or we need to brace for the pain when it eventually hits.

  • Report this Comment On June 04, 2010, at 7:57 PM, jan1971 wrote:

    Important article. The budget deficits of the US federal government have been very high since 2001 already. For most of the Bushyears the USA had a budget deficit that was much higher than the maximum 3% deficit of stability-pact for the Euro. Especially in combination with the large trade deficit (for a long time for every 2 dollars of export, 3 dollars are spend on imports), the budget problems of states, counties and municipalities, the uncovered obligations that can hit the US government in case of serious losses by Fannie Mae and Freddie Mac and the large debts that many US households have the danger of the situation can not be emphasized enough. It is a miracle that investors keep investing in US bonds. Returns are very low and risks are quite high as the political situation doesn´t allow for serious budget cuts and/or tax hikes. It helps that the Federal reserve is buying US government bonds, but it also a very worrying sign that that is necessary.

    The situation can and will go wrong in 2 ways: The enormous creation of money by the FED and the deficits of the US government and states will lead to high inflation and a fast declining exchange rate towards other major currencies. Because the weakness of the Euro and the Yen and the policy of the Chinese authorities this will not happen in the short run although it is certainly possible in the longer run.

    Second, investors can turn their back on US bonds and possibly on US real estate and stocks. Don´t forget that for example foreign investors don´t need the USA. The US counts for only 5% of world population and only around 25% of the World economy and that last number is declining quite fast. So investors have alternatives.

  • Report this Comment On June 04, 2010, at 9:06 PM, kalho13 wrote:

    mythshakr - you should trust neither a politician, whose attention span goes no further than the next election, nor a major financial organization who has little interest in the individual investor. In the end it is you who is ultimately responsible. If you do not understand, then it is your responsibility to learn. Ignorance has never been a valid excuse no matter how many people choose to be clueless. Once you take responsibility there is no one else to blame.

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