“Bill” Board Day 7 – Proverbs 22:7b … and the borrower becomes the lender’s slave

In 2011, the government collected $2.3T in tax receipts and spent $3.6T. The difference -- $1.3T (~ 40% of expenditures) -- had to be borrowed.  The interest on the debt in 2011 was $454B.

What happens if we continue to tinker around the edges and basically do nothing about our profligate spending? What if we continue with the policies proposed by the Obama administration?

The answer is not pretty (See graphic below).  Extending the analogy I started in the prior post where I compared the federal government’s fiscal policy to that of a household, over the next four years, our household’s debt will climb from $150,000 to $228,201.

Our household income will increase from $23,000 to $31,614, but we will have to borrow an additional $8,699 per year (a total of $21,699) to cover our actual expenditures of $53,313. Our actual income will be sufficient only to pay for our fixed costs (viz., government entitlements) and some small part of the credit card interest (viz., interest on the debt). The borrower becomes the lender’s slave.

For those who are interested, the model I used to project these results made these assumptions:

·       Government expenditures were divided into four categories: entitlements, defense, all other government, and interest on the debt.

·       Sequestration was assumed to occur in 2013 and is represented as a 5% cut in defense and a 5% cut in other government spending.

·       The model assumes the debt as of 2011 is $15T.  This does not account for off balance sheet liabilities, which place the debt at between $60T and $100T.  Some sources have it as high as $120T.

·       The federal budget is assumed to grow at a rate of inflation of 2.5% per year.  Note, my understanding is that anything less than a 4% to 7% growth rate in Washington is considered a cut.

·       Boomers are retiring. As a proxy to determine growth in benefits, which will be a function of the growth in number in this age group and inflation (assumed at 2.5% per year), I calculated the following:

-       Number over 65 eligible to receive benefits in 2010 = 40M, Number in 2030 = 72M (US Census Bureau)

-       Currently average SSA monthly benefit is $1,200 per month[1] ($14K per year) (SSA).

-       Estimated benefit in 2010 = 40M * $14,000 = $560B

-       Estimated benefit in 2030 = 72M * $14,000 * (1.025)^20 = $1,650B

-       Annual growth rate is found by solving the equation $1,650B = $560B * (1+X)^20 or X = 5.6%.

·       The model assumes that GDP growth and Tax Revenues as a function of GDP fall within historical values.  In other words, both the economy and the tax structure, based upon their intrinsic nature, can only produce numbers that are supported by historical experience. The numbers I used were taken from the White House website on the budget and delimited to the years 1950 through 2011.  

I consider these to be reasonable assumptions, given our track record to date.  What I do not consider reasonable is our President’s penchant to continue to borrow money we do not have to pay for programs that we cannot afford, many of which are not constitutionally mandated.

When your ship is flooding, your focus is to stop the flooding.  When your business is failing, you put the right people in place to understand and correct the problems.  When your country is failing, you elect new leadership.

Vote November 6^th.

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