Thursday, January 6, 2011

Longing for Y2K

The 2010 Census data was released just before Christmas.  A friend worked for the Census for most of last year I’d ask him regularly: “So…what are we up to?” The official answer is that there are 308,745,538 of us. Hi there, nice to meet you!!! That’s 27,323,632 more Americans than in 2000, or 8.85%. Last week we marked the end of the 00’s, which I refer to as the “owes” decade, and I got to thinking about the last decade.

“Survivor” didn’t debut until May 31, 2000 – bringing with it “reality television” which of course isn’t real at all. “Mission Impossible II,” “Gladiator” and “Cast Away” were the top three movies based on box office and “American Beauty” won the Oscar. Nokia had the best selling mobile phone. Facebook founder Mark Zuckerberg was in high school and Google was in its infancy, just 2 years old.

The U.S. Budget in 2000 was $2 trillion with a surplus of $236 million. In 2010 the U.S. Budget is $3.1 trillion with a deficit of $1.6 trillion.

California’s Budget, including General, Special and Federal monies was $137.6 billion in 2000. For 2010 the same budget is $216 billion.
The U.S. grew 8.85% in population and the budget grew 36% with an average annual inflation rate of 2.5%.  California’s population grew 10% but its budget grew 36%.

Any business that had a large increase in budget would indicate to me that the demand for their products and services had proportionately increased. Government is not a business and shouldn’t be considered one. Its function is more complex and more akin to a charitable organization whose mission is to deliver services to its constituency. There is no reason, however, that common-sense financial practices shouldn’t be utilized, as they are in business and non-profits alike. Business uses debt as do individuals, and that is often a good thing.

Debt allows a business to invest in research, development and have a longer-term vision than being just cash based. Similarly individuals use debt to finance large purchases such as houses and cars – items that have long investment value and likely couldn’t be obtained with short term cash flow. Government too incurs debt.

The U.S. incurred its first debt to pay for the Revolutionary War: $75 million in 1791. Only under President Andrew Jackson in 1835 did the U.S. ever not carry any debt whatsoever. The U.S. debt in 2000 was $5.6 trillion and represented 58% of the GNP of the country. Today the debt has nearly tripled to $14 trillion and in 2011 will represent 100% of the country’s GNP – a feat never reached before in American history. Once our debt exceeds our income the nation gets closer to insolvency.

The debt is held by many different entities, and the majority is still U.S. held. (This too is likely to change in 2011 where the majority of the U.S. debt will be held by non-U.S. entities.) The current debt ceiling is $14.3 trillion – which is the limit that can be borrowed. Over the past decades the debt ceiling has been regularly increased with an occasional blip of publicity. In the next weeks the debt ceiling will have to be increased again – or the U.S. will lose its ability to borrow money which would be devastating to the U.S. and the global economies. I fully expect a more vociferous resistance to an increase than in the past. This will make for good television and punditry but won’t change the fact that it will be increased.

These first few weeks of January most of us are receiving our Christmas credit card statements. Wouldn’t it be nice if we could just increase the credit line and keep on spending? That’s essentially what the debt ceiling is: an increased line of credit. At some point our creditors will say: enough – you actually have to pay us back. The U.S. will be unable to borrow more nor pay its bills will mean a form of insolvency which will be the War of the Millennium.

Avoiding this war means making choices. It won’t be a war between Republicans and Democrats for which program to shave or cut – it will be a war between those of us who believe that we must put our fiscal house in order and those who merely provide lip service. Fiscal order starts and ends with a balanced budget. Terribly boring and simple: spend what you bring in. Period. Note that having a break-even budget would simply freeze the debt at the current level and not begin to pay it back. It’s a start.

It’s a drastic departure from the recent Democratic approach of more debt in the short term with the belief that long term economic growth will resolve the short term issues. Republicans this week proposed a tweaking of the Democratic approach, with a series of program changes that would “save” $300 billion. Under the Republican plan the U.S. would still run a $1.3 trillion dollar deficit each year.

Where would I find $1.6 trillion in “savings”? President Obama’s deficit commission couldn’t find a way to balance the budget for some 35 years and even then they couldn’t agree.  The devil is in the details and fodder for future blogs! Before we look at the details we as a nation must agree to a balanced budget – and we are a very long way from that agreement. In fact that’s not even part of the discourse. I never thought that I’d be longing for those halcyon days of Y2K.

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