Last week, I wrote about how using the debt ceiling to force spending cuts is a terrible idea.
If you missed that article, you can read it here.
In a nutshell, it’s a bad idea because it…
- Damages our country’s reputation when we allocate the money but threaten to not pay the bills
- Can hurt the U.S. credit rating (and it has) and cost taxpayers billions in borrowing costs
- Could potentially send the stock market reeling
- Straight up doesn’t work.
With all that said, it’s clear that the federal government can’t go on spending more than it takes in year after year. The national debt is now at $31.6 trillion and counting.
The projections are even worse. The annual deficit will hit $3 trillion within a decade, and interest costs on the debt will rise to $1.4 trillion by 2033 – according to the Peter G. Peterson Foundation, which advocates more responsible fiscal policy.
Think of all the money that could be spent on high-tech infrastructure and research and development if we didn’t have to pay trillions of dollars in interest on the national debt every year…
That kind of investment in our economy is what sends the stock market up over the long term.
But what can be done about debt and deficits, other than another ridiculous debt ceiling showdown?
What’s Practical?
It’s easy enough to say that we should slash federal spending across the board. But it’s not realistic.
As I pointed out last week, Social Security, Medicare and defense are three of the biggest spending programs. And they’re set to grow in the coming years as more baby boomers age into retirement.
And in January, House Speaker Kevin McCarthy said that cuts to Social Security and Medicare were “off the table.” He also doesn’t want to touch the defense budget.
Democrats largely agree with that.
So how about tax increases?
They’re also relatively unrealistic. Neither party wants to be the one to raise taxes on average Americans – though many Democrats do talk about raising taxes on the rich.
Yet even if tax hikes on wealthy Americans could get through Congress (a big “if”), they still wouldn’t balance the budget.
According to the reputable Manhattan Institute, implementing popular proposals to raise taxes on corporations and the rich would generate less than $4 trillion total over the next decade. But we’re on a spending path to produce annual deficits of almost that amount within a decade.
Also, it’s not clear to me that taxing the rich more would be fair. The U.S. tax system is already very progressive. That is, the top 20% of income earners pay about 68% of all federal taxes, far more than their share of pretax income.
Options Galore
The Congressional Budget Office has produced an extensive list of options that would help to balance the budget. And it estimates what each option would save over the course of a decade.
Some are tiny…
For example, eliminating agriculture subsidies would save only $49 billion a year.
And some are huge…
A value-added tax (VAT) – which is a consumption tax imposed on the increase in value of a product at each stage of the supply chain – would reduce the budget by $2 trillion to $3 trillion a year. VATs are used by many countries to generate revenue.
But there’s one option I think we have to consider: healthcare. Consider that Medicare accounts for a full 10% of the budget. And it’s projected to grow from about $1 trillion this year to more than $1.8 trillion seven years from now. Add to that the enormous costs of Medicaid and other government health programs, and you’ve got a huge and growing expense.
But Medicare itself isn’t the problem. The real, underlying problem is healthcare in the U.S.
We spend nearly three times as much on healthcare as other rich nations. But health outcomes are not any better than they are in, say, Europe.
And huge amounts of money – 30% of all health spending, by one estimate – are wasted on overtreatment, fraud and abuse, administrative costs, and failures of care delivery. And there’s a serious lack of preventive care, which is much cheaper than treating illnesses once they’ve progressed.
By reforming the U.S. healthcare system, we can bend the soaring costs of government healthcare programs back to Earth and save a lot of money.
That’s my favorite budget balancer. There are scores of others.
I’d love to hear what yours is. Leave me a comment below.
Invest wisely,
Matt