After a period of growth and semi-stability where many hoped that the worst of the market volatility was behind us, last month we experienced dramatic downturns not seen since the dark days of 2008. Some will blame the Dow’s freefall on Standard & Poor’s decision to downgrade U.S. Government debt from its AAA to a AA+ credit rating. However, in my view, it is more likely that the recent steep declines reflect the market’s broader frustration with the difficulty our elected officials had striking a debt ceiling compromise and the fact that Washington’s solution is a temporary fix. Congress and the President ultimately agreed to a budget cut of $2.1 trillion, not the $4 trillion that initially had been discussed.
If there’s one thing that the fractious debate over raising the nation’s debt ceiling has taught us, it’s that getting the nation’s fiscal house in order is no small task. Amazingly, over the last few years, our federal government spent roughly 40 percent more than it made. Here’s a look at last year’s balance sheet:
|Recent Budget Cut:||$38,500,000,000
(about 1% of the budget)
Last year alone, our nation spent $1,650,000,000,000 more than it took in. In Washington Could Learn a Lot from a Drug Addict, the Public Notice Research & Education Fund (PNREF), a non-profit dedicated to educating the American people about economic policy, likens our nation’s chronic overspending to a junkie’s addiction to drugs. They insist that unless the “cycle of addiction is broken,” our economy will continue to suffer. I agree. Although politicians promise to reduce spending during their campaigns, once elected, our Congressional representatives look to direct spending that favors their own constituents, trying to ensure that they remain in Washington. We’re trapped in a vicious cycle of over-spending with no light at the end of the tunnel.
Tackling any big job requires first understanding the scope of the problem – and let’s face it, all those zeros on the federal balance sheet are dizzying. In fact, for many, including Congress, these numbers may be so big that they become meaningless. To gain some real world, out-of-the-Beltway perspective, I’d suggest that Congress strip away some those intimidating zeros from the federal balance sheet. In fact, if we delete eight zeroes, we would arrive at a balance sheet that neatly illustrates the imbalance between federal income and spending in terms the average American can relate to. Take a look:
|Total Annual Income||$21,700|
|Amount of New Debt Added to Credit Cards:||$16,500|
|Outstanding Balance on Credit Cards:||$142,710|
|Amount Cut from Annual Budget:||$385|
Now, if we view this as a balance sheet for an American family, we would all agree that they are in perilous financial trouble. How could a family owe $142,710 and continue to overspend their income of $21,700 by $16,500 a year?
If Congress were to review this “de-zeroed” balance sheet, I think they would gain some valuable perspective on the work they have ahead. Simply, the cuts Congress struggled to make last month amount to a family owing $159,210 on their credit cards cutting $385 from their annual spending. $385? That’s just a little more than a dollar a day, the equivalent of forgoing your workday coffee for six months. If you were in such serious debt, wouldn’t you feel you needed to do more than skip your morning coffee every other day? Yet, we’ve watched Congress struggle mightily and pat itself on the back for cutting the equivalent of 120 cups of coffee from the federal budget.
Additionally, Congress has punted and given the task of cutting another $1.5 trillion from the budget by the end of this year to the newly created Congressional Joint Select Committee on Deficit Reduction. This committee of 12—six Republicans and six Democrats, split between the House and the Senate—must draft legislation by November 23, 2011 to be voted on by December 23, 2011. If the group cannot come to consensus regarding the budget, automatic cuts will occur across both defense and non-defense programs. Perhaps even more damaging, indecision and inaction in Washington will continue to chip away at already shaky consumer confidence.
Another drop in consumer confidence would clearly deliver another blow to our economic recovery where growth has been running at about half the expected speed due to tight credit conditions and a depressed housing market. However, if the Congressional Joint Select Committee on Deficit Reduction makes the necessary budget cuts, and positive signs like strong corporate earnings and robust exports continue, we could see a real improvement in investors’ confidence that will move steadily from Main Street to Wall Street and give our recovery the boost it needs.
In the meantime, if you’d like to urge your senators or representative to work to cut federal spending, check here for contact information.