Defusing the Debt Bomb

 At the conclusion of my last blog about DOGE, I teased with the comment that some suggestions to avert the debt crisis would be forthcoming. I will now proceed to offer some ideas on how to get a handle on the problem that many knowledgeable people consider both unsustainable and existential. The U.S. federal government closed its most recent fiscal year books on September 30, 2024. With 10/1/23 - 9/30/24 government revenues at $4.92 trillion and expenditures for that same period at $6.75 trillion, the net result was a deficit of $1.83 trillion. That is a boatload of red ink. The $1.83 trillion deficit represents 6.5% of the Gross Domestic Product of the United States. That deficit level historically has only been seen during times of war or times of economic recession. With the economy growing at 3.0% per annum and the deficit at 6.5% of GDP, that scenario eventually leads to doom.

Now, let's look at a situation where government revenues (via higher taxes) increase by 10%, while simultaneously government spending is reduced by 10%. This translates to a revenue increase of $492 billion and a spending decrease of $675 billion. The new math is as follows: Annual government revenues now total $5.41 trillion with annual government spending at $6.08 trillion. The resulting deficit has been lowered to $670 billion (from $1.83 trillion). An annual deficit of $670 billion represents 2.3% of Gross Domestic Product. With sustained growth in the economy of 3.0% per annum combined with a deficit of 2.3% of GDP - eventually you grow out of the crisis and defuse the debt bomb.

Based on previous writings, I acknowledge sounding like a broken record by repeatedly harping on the risk posed by a $37 trillion national debt combined with annual deficits of $2 trillion. This is on top of the actuarily computed Present Value of the government's unfunded liabilities well in excess of $100 trillion. Before providing some additional details on how to tackle the debt bomb, there are a handful of foundational principles that need to be addressed if there is to be any success in solving the problem. First and foremost, there is going to be financial pain experienced by the vast majority of individuals to varying degrees. It is unavoidable. The pain will be widespread. It is vital to the process that everybody should share in the pain - "Misery loves company" will make the necessary sacrifices more acceptable. If possible, it should be viewed as a national challenge where all citizens share in the national goal of restoring sound money.

As mentioned earlier, my "plan" includes increasing government revenues by 10%. This will not be easy, but it is possible, and essential. Instead of promoting tax cuts, the Trump Administration should take a page from the Hippocratic Oath and "First, do no harm." It's absolutely ludicrous to cut income taxes when confronting an annual deficit approaching $2 trillion. For those supply-siders claiming lower taxes will supercharge economic growth and thus "pay for" the tax cuts, history tells us otherwise. For every $1.00 in tax cuts, there is an approximate $.40 upward bump in collected tax revenues. A prime example of this would be the vaunted 2017 Trump tax cuts. With the exception of benefits to the wealthy, that legislation was overall very costly and failed to deliver widespread economic benefits.

I propose corporate tax rates remain the same and individual income tax rates be revised upward. This would apply to all income earners except those Americans at or below the federal poverty level, Many middle-class taxpayers believe the ultra-wealthy and wealthy should be the exclusive source of increased income tax payments. The math doesn't work with this approach. There are simply not enough wealthy individuals to move the needle. The great bulk of taxpayers fall within middle-income parameters. They will pay slightly more when the tax code is revised, with steeper increases paid by the wealthy and ultra-wealthy. The tax increases will not be at levels that greatly encumber the lives of taxpayers. For those high-income earners who will complain and claim they are being treated unfairly, I would like to remind them they have made out like bandits over the past 15 years. The top 10% has almost exclusively enjoyed the benefits of overly stimulative monetary policies and debasement of our currency since the Great Financial Crisis.

We will now direct our attention to the expense side of the federal budget. I propose mandatory, uniform 10% spending cuts across every single federal agency and department. There would be no exceptions, no sacred cows such as the Department of Defense, Medicare, Medicaid, and Social Security. Cuts in the Defense Department would be focused on the procurement process for weapons systems. For far too long, there has been an incestuous relationship between defense contractors and high-ranking military brass. U.S. taxpayers have been ripped off by the military-industrial complex. The United States defense budget is roughly the size of the next seven largest military budgets around the world, combined. Even in a dangerous world, I don't think it would be difficult to find $90 billion in cuts.

As previously noted, even the beloved entitlement programs should not escape spending reductions. In the 2024 federal budget, Medicare accounted for approximately 13% of total federal spending, with a total outlay of $839 billion. The entire U.S. healthcare system needs to be revamped, particularly Medicare. About 17% of our GDP is spent on healthcare. This is double any other developed countries that have even more challenging demographics than America. I'm not yet to the point of advocating the creation of "Death Panels," but I would be remiss if I didn't mention that 20% of Medicare costs come in a person's last year of life. A year that is normally not filled with rainbows and unicorns.

Medicaid is administered by individual states within broad federal guidelines. The programs are primarily (70%) funded by the Feds. Medicaid accounts for 8% ($560 billion) of federal spending. Consideration should be given to restricting eligibility and limiting reimbursement for certain services. Also, instead of the current matching system, it would make more sense to issue block grants to states or cap annual growth in payments to states. Lastly, further restrictions should be adopted that would limit asset transfers from individuals who subsequently apply for Medicaid benefits.

Even the most sacred of sacred bovines (Social Security) should not escape the entitlement reformers. Until it is overtaken by interest payments on the national debt in the next few years, Social Security will account for the government's largest expense item. Social Security accounts for 22% of federal spending, with a total outlay of over $1.4 trillion on an annual basis. There should be multiple changes to the program. Instead of receiving full benefits at age 67, it should be extended to age 69. Applications for Social Security Disability Insurance (SSDI) should be carefully reviewed with the more blatant abuses hopefully curbed. I would advocate getting rid of the $255 Social Security life insurance benefits. I would also endorse getting rid of surviving spouse benefits. Lastly, and most controversially, I believe Social Security benefits should be determined under a needs based formula.

A year or two after introducing across the board 10% spending cuts, I would introduce legislation to eradicate the Department of Education, as well as the Department of Energy and Department of Agriculture. It probably won't happen, but it wouldn't break my heart to privitize the United States Postal Service. I am confident that practically everybody who reads this blog will disagree with most, if not all, of the various suggestions tendered in this blog. Conservatives will vociferously object to the proposed tax increases. Liberals will vociferously object to the proposed spending cuts. Compromise is apparently a relic of the past. Unless sacrifices are made, absurd annual fiscal deficits will continue for an indefinite term and further erode the purchasing power of our currency. Don't keep your head in the sand. Buy hard assets.