William A. Manning

SENSIBLE DEBT REDUCTION

With our national debt over $14 trillion, this country’s politicians need to stop playing the blame game and get serious about their borrowing and spending addiction. While credit is useful when used responsibly, i.e. buy a house, emergency car repairs or the expansion of an assembly line; but it can be very destructive if it is abused, i.e. maxing out limit losing in Vegas, shopping spree, or a company entering a highly competitive market outside of its expertise without considering the ramifications of failure.

The federal government has abused its credit in the same ways as the examples above:

                Vegas: War on Poverty and Bailouts

                Shopping: Bridges to nowhere, expanding municipal airports

                Failure: Freddie and Fannie, Social Security, Welfare…

Just to name a few.

The options currently being discussed increases borrowing in an effort to create a safety net; this doesn’t address the problem in the correct way. Increasing the debt limit will only lead to increased spending. To effectively control spending there needs to be a permanent credit limit that Congress cannot lawfully exceed. Once that is in place, the task of cutting spending can occur. There are many opinions on this subject, and these suggestions may have already been debated, but I’ll add them anyway.

Most addicts when they realize they are an addict go through a rehabilitation process. The politicians in Washington, D.C. don’t feel that they need to because they feel it’s “Not my fault.” In reality, it is. Congress holds the purse strings and the taxpayer’s are the ones that fill that purse. Congress has held the purse upside down and maxed out the credit cards in an effort to buy votes with our money. If you think campaign finance reform was the only way to stifle campaign spending, you probably haven’t thought that incumbents have a bigger purse than their competitors.

Problem 1:

Every budget for a government department has a mandatory yearly increase. If a politician states that they are going to cut spending by 2% every year but the mandatory increase is 7%, then spending actually increased by 5%. The only thing that was cut was the amount of the increase.

                Example: Widget Inc. marketing sales team has to figure out a way to increase the price of the Widgetator and make the customers think that they’re getting a bargain. The solution is to increase the total price of the Widgetator by 50% and add a 25% redeemable coupon on the packaging.

                                Math Visual: $2 original price

                                                         $3 with 50% increase

                                                       $2.25 after coupon

Effective? Yes. Misleading? You bet. Ethical? That’s a matter of opinion, but we should demand more transparency when it comes to someone spending/borrowing $3 trillion that we as taxpayers have to pay.

Solution 1:

Eliminate the mandatory increase. Therefore the illusions of budget cuts stop. By simply doing this, Congress can control spending more effectively and save billions every year. Well “save billions” is the incorrect term. A more accurate term is “NOT SPEND BILLIONS.”

Problem 2:

Waste, fraud, and redundant programs lead to more waste, fraud and redundant programs. That sentence alone is a good example of redundancy. The real problem is redundancy. The more departments that administer the same or similar programs, there is an increase chance of fraud.

                Example: Picture a sieve and a funnel. A sieve is designed to allow as much fluid to go through while blocking large particles from escaping. Great for straining water from spaghetti, but if you use it to pour homemade spaghetti sauce into a jar, chances are only a little bit actually goes into the jar and there’s a huge mess on your kitchen counter. If the mess isn’t cleaned up properly, unwelcomed guests in the form of rodents and roaches will gladly enter your home to “help.” Then an exterminator has to come in to get rid of the “help.” The final result? Less sauce to eat later, a trash can full of paper towels and an exterminator bill. This means you have to spend money making more sauce, buying more paper towels, and a monthly visit from the exterminator to keep the unwelcomed “help” from coming back.

                On the other hand, a funnel allows fluid and particles up to a certain size to go through with ease. Using the spaghetti sauce analogy again, we can effectively control the direction and the speed we want the sauce to go. There ‘s only one hole for it to go through so we have a better view and takes less time to correct a blockage than it does to clean off the entire kitchen counter.

    The federal government’s approach to spending has a very sieve-like outcome. This leads to wasting time creating a department to correct the problem, and as the old saying goes “Time is money,” both time and money are wasted.

Solution 2:

                The federal government needs to re-redefine their term “streamline” to its original meaning. They could simply look at a garden hose to see the difference between “stream” and “spray,” and the effects of each. Congress’s current definition has spending that is neither streaming nor in line. It’s uncontrollably pouring everywhere. Making a mess of the economy and adding expenses that will result in more spending.

Problem 3:

                Debt reduction needs to be our most primary concern. Our debt is putting our nation in a precarious situation on every level, be it national security, economic, or providing assistance to those who have a genuine need for it.

On a personal level, people have to provide for themselves these three basic things in order to survive:

The environment in which these three can be obtained, with the smallest amount of difficulty is one that has a vibrant economy, limited taxes, and is secure in keeping that the possibility of violence on the population is deterred, though not impossible.

                If the federal government continues with its addiction of spending, the tax revenues needed to pay for the loans and interest will continue to rise. Those tax revenues will have to be diverted from essential services such as defense, infrastructure, social programs and day to day operations of government itself.

                One solution to bring in more tax revenue being offered is to increase taxes on business and individuals. While the intake of revenue will increase in the short term, tax revenues will fall thereafter. To understand the reasons behind the decreased tax revenues with higher taxes is to understand basic economics along with human nature.

                Basic economics dictates that if a business experiences higher costs, that business will transfer those costs to the price of the product or service. Since taxes are a cost of providing product or service, it is reasonable to assume that companies will transfer the cost of taxes to the consumer in the form of higher prices.

                The result is a larger portion of an individuals’ income will have to go into paying for their basic necessities of food, shelter, and clothing. That individuals’ (current or future) purchasing power is further reduced when prices of non-essential items rise due to taxes and less income can be set aside in the form of savings or investing.

                A basic understanding of human nature dictates that if an individual perceives that they are being penalized for being successful, they will naturally relocate to an area where success isn’t frowned upon and even encouraged. In today’s political climate, being successful leads itself to envy and resentment.

                Politicians have a peculiar talent to latch onto their constituents emotions, with jealousy being one of the most destructive of all. Jealousy has led to murder, theft, and physical attacks in the forms of acid or cutting of the face.

                Answering the calls to raise taxes on wealthy individuals is actually cementing the belief that jealousy is a positive emotion, instead of responding that they too would’ve achieved the same type of success if they hadn’t focused that emotion into a negative action. When used in a responsible fashion, jealousy can move people into changing their habits and lead them into discovering their own skills and talents.

                Lastly, a basic understanding of economics and human nature dictates that wealthy individuals have a tendency to make investments that will lead to more wealth. Those investments are usually in the form of businesses that generate profits.

                As we have seen earlier in this portion, if a consumer’s purchasing power is reduced due to higher prices, logic will naturally state that people are buying fewer products. If fewer companies are profitable, then fewer investors will purchase said company’s stock, thereby reducing the amount of income that could’ve been used even further. This income would’ve expanded an assembly line and/or hired new employees.

                Since the majority of wealthy individuals’ investments are the backbone of a capitalistic economy, it is reasonable to think that if taxes were higher there would be fewer investments in the economy due to wealthy individuals having less disposable income. This, in turn, would lead to decreased economic activity.

Solution 3:

                Simplifying the 67,000 page tax code is a start (FairTax). Lowering taxes is physically easy; rising above jealousy is an emotional struggle. Getting other people to rise above their jealousy is almost impossible.

                Educating the country on basic economic principles has tangible benefits. More people will use credit wisely; become savvy shoppers and willing savers.

                Using the “billions not spent” to pay off the smallest loan first, Congress could use a “snowball” payment structure to pay down and eventually pay off all loans. “Snowball” payment structures are simply paying down the smallest amount until it is paid off then using those funds, PLUS the “billions not spent” to pay down the next. When a loan is paid off, all the funds that are freed up are then used for the next.

                                “Snowball” Example (Paying off smallest loan):

               

“Snowball” Example (The effect of “snowball” on largest loan):

(Note: No accrual of interest added to these figures, just a rough estimate)

Notice the amount being paid is getting larger? Every personal financial advisor will say to do the same thing. They do not advise getting another loan.

One thing I hope you take away from this example is that Congressmen don’t have the personal discipline to do this. Voters need to demand that it would be unlawful to deviate from this payment plan so future Congress’s couldn’t redirect the additional funds from the “snowball” payment plan to pet projects, the same way that Social Security was wasted.

Finally, with the $14 trillion debt being paid off, our national security should never be put into such jeopardy again by amending the Constitution and the Congressional Budget Rules should be made to note that total debt exceeding 20% of GDP are unlawful and current loans must be paid off before borrowing more.