The Federal Debt

We all carry debt, right? A mortgage, a car loan, student loans, credit card debts – It is the American way. Why should the fact that you don’t make enough money stop you from living the way you want? Heck, even our government carries debt. Maybe your county has sold bonds to pay for a new courthouse or prison. Maybe your city has borrowed money from the state to upgrade a main thoroughfare into the downtown shopping district. Maybe the federal government has issued treasury notes to help pay for the war in Iraq. Well, that’s what happens when the government incurs expenses that are greater than normal revenues allow. But what happens when you don’t pay back your debt? Besides accruing interest, you get penalties. It you continue to not pay off your debt, you get threats, first from the creditor, then from a collection agency. What happens when the federal government fails to pay off its debt? It prints more money or issues more bonds to cover the interest on the debt, incurring more debt. This is exactly how we have ended up with over $7.9 trillion in federal debt (well as of August 29th, 2005, $7,930,506,290,857.97 to be exact). Since the federal government is "owned" by the citizens of the United States, this means each one of us owns $27,000 of the federal debt. And it continues to go up by $1.5 billion every day. Where does all that money go? That is a discussion for another blog, but today I want to explain how the Federal Debt has grown since the Unites States was created.

Click on this link, The_Federal_Debt.pdf to see the charts referenced below.

When the United States Constitution was ratified by the individual states, the Federal Government was already in debt. As part of the treaty negotiations with Britain at the end of the Revolutionary War, the "national" government (under the Articles of Confederation), assumed all of the debt incurred by the individual states during the war. This put the Federal Debt at just over $75 million in 1790. In the early years of the nation, the Federal Government remained quite small (and frugal), thus they were able to pay down about half the debt before the War of 1812 broke out and debt began to accumulate again. After the War of 1812, the government started paying down the debt again. This was a continuous cycle – War/Increase debt, then Peace /Decrease debt – and thus was until World War II. At the end of WWII, the US was a prosperous place, everyone was making money, quality of life was being raised across most of the country. And the Federal Government was spending money too - building roads, loans and grants for veterans, helping people across the country. But they weren't paying down their debt. Then the Cold War took hold and the fight against communism caused the Federal Government to increase the Federal Debt tenfold, from $260 billion in 1945 to $2.60 trillion in 1988. With the collapse of the Soviet Union in 1989, you would think that the Federal Government would scale back and start paying off the debt, right? Alas, no. As the victorious superpower, the US had to maintain its vigilance, policing the world and protecting democracy from dictators and tyrants. Kuwait, Somalia, Panama, Bosnia, Afghanistan, Iraq, just to name a few. And spending was up domestically, on corporate welfare (tax credits, bailouts and subsidies), individual welfare programs, stateside defense infrastructures and education. In the last 17 years the Federal Debt more than tripled to its current level of $7.9 trillion.

Who is responsible for this debt? We all are. We elect a Congress and President, Congress fights to get more Federal funds back into their home districts, the President spends Federal funds to keep a strong American presence in the world, while trying to keep taxes lower to help whatever special interest group happy. We all re-elect them because we get something for "free" and we like that the world is becoming "Americanized." It is about time we break the cycle that has perpetuated for the last several generations.

But how can the Federal Government ever pay this down? Just like we do any other debt. First, they have to stop spending more than they take in. It sounds simple, but it can be difficult, as many of us know. Second, they need to establish a repayment schedule that pays towards the interest and the principle balance. Based on the current estimates from the President's Fiscal Year 2006 Budget, the interest on the Federal Debt is approximately $211 billion or 2.42% (I wish my mortgage was that low). I would set up a payment schedule of $400 billion annually (about 4.5% of the FY06 debt), the Federal Debt could be paid off in 31 years (by 2037). This is the equivalent of putting an amount equal to the Defense budget towards the Federal Debt each year (not including the interest payment, which is already in the budget). Alternatively, if this is more than the taxpayers feel comfortable with, set up a payment schedule of $300 billion annually (about 3.5% of the FY06 debt), in which case the Federal Debt could be paid off in 50 years (by 2056). This is less of a burden, but it still pays off the debt within the next generation.
Keeping a balanced budget is key to this. I propose a Constitutional Amendment to stop overspending unless absolutely necessary. Yes, there may be times when the Federal Government will need to borrow money, but it must be limited and there must be a finite plan to pay it back. It is the only way we can ensure that our future generations will have a future unburdened by our spendthrift ways.