PrintJanuary 23, 2011
Full Faith and Credit in the Age of Distrust
Americans are waking up. Less than four years ago an Act by Congress to raise the debt ceiling would hardly raise an eyebrow, let alone be cause for heated public discourse. But since 2007 the debt ceiling has been raised five times; each with greater scrutiny by a public growing more concerned. Most of us understand family budgeting and question the actions of Congress because they don't seem to follow the same rules everyone else does. But public servants in return would have you believe that the federal budget is too complex and tedious for the average American to understand in terms of the family budget, and lament that we should just trust them, because that's what we elected them to do.
In my mind this raises two issues. First, trusting them has led us into a hopelessly insurmountable mountain of public debt that will likely take generations to pay off. Second, my personal experience tells me that when people don't actually answer honest questions, it is for one of two reasons; either they are clueless about what you are asking them to explain, or they are afraid of what you might make of an honest answer. Each of these is probably true depending on to whom in Congress you speak.
The reality is that federal budgeting is really family budgeting writ large with some different dynamics that can be explained using our American family model. The financial principles of income, outgo, obligations and debt change no more from family to country than the laws of physics change between where I live now in Florida, and where I grew up on Cape Cod. It is simply a matter of scale.
Most families have monthly obligations necessary to live. Typically they are rent or mortgage, food, energy (utilities), transportation (car payment, gas or bus and train expenses), etc. This mobility allows you to work, which in turn allows you to pay your obligations. Another obligation is your debt. These debts must be regularly satisfied as necessary, regardless of source, if you want to maintain a good credit rating. Most responsible families will closely monitor their obligations in relation to their income and ensure the former doesn't exceed the latter.
Meet the Smiths
Let's assume our responsible model family has two parents and three children. Grandma and Grandpa are living with them because they are on a modest social security income. In addition to providing childcare when necessary, Grandpa and Grandma Smith allot a token portion of their social security income to defer food costs, but retain the rest for incidentals and birthday gifts for their grandchildren. Grandma and Grandpa are net consumers in the family, but the Smiths place value on having their extended family with them. The three children are pure consumers, but they're still young and their needs are modest.
Mr. Smith works full time, while Mrs. Smith works part time to augment the family income. Together they make $40,000 a year. Mrs. Smith runs the family checkbook, largely because she has the time to do it and makes most of the necessary family purchases. They have agreed to do this because she and her husband have the same principles and values. They see eye to eye on necessities and together discuss any non-necessary purchases before they make them.
Like most Americans, the Smiths pretty much live paycheck-to-paycheck. On the rare occasion where there is income left over, Mrs. Smith uses some of it to pay down the household debt and puts some of it in savings for the months where outgo exceeds their income. They keep their head above water, provide the necessities to the family, service their debt and don't make any unnecessary purchases unless they can agree to do so without impacting their ability to pay for what is necessary.
From this responsible family we can deduct three principles:
- Provide for what is necessary for your family (food, shelter, clothing, transportation).
- Responsibly manage your debt.
- Provide non-necessary goods and services when you are able to afford it without any impact on your ability to ensure 1 & 2 above are satisfied.
These principles are clear, concise and are applicable whether you are building a family budget that can fit into a file folder or ‘writ large' in a national budget that you cannot lift without the aid of a forklift. Following these principles even when the other is not watching is what inspires trust between them.
Meet the Smythes
Demographically the Smythes are identical to the Smiths. Their family finances, however, are decidedly different. Everyone in the Smythe Family has an equal vote in family and personal purchases. Mr. & Mrs. Smythe (the income earners), Grandma Smythe and the children all have one vote. Grandpa Smythe, as the family patriarch, can veto any vote unless the four of the remaining six Smythes overrule him. The Dynamics of Grandpa Smythe's leadership requires him to give a little, especially to the children and Grandma, who will continue to keep his desires in the majority. Plus Grandpa Smythe also knows the bank manager, and can essentially receive endless credit card limit extensions - if the family (grandma & the children) agree.
The Smythe children like to live large and have many friends because they are generous with the $40,000 a year wealth earned by Mr. and Mrs. Smyth and the endless credit afforded them. Grandpa publically encourages the children to be responsible and tries to limit them to one major purchase each month, telling his son and daughter-in-law it is as important to teach responsibility as it is important that they have friends to keep them empowered and feeling wanted. So Grandpa Smythe also makes sure they each get to treat all their friends to the movies at least once a month. Grandma Smythe is just happy to see smiles on the kids' faces and is willing to go along with whatever Grandpa suggests.
Mr. & Mrs. Smythe are concerned about the growing debt. Sure they live well, but after recently looking at a purchase order for a new computer he realizes that continuing to make minimum payments it will take 27 years and over time, $13,000, to pay off a $2000 computer that will be obsolete in 2 years. Mr. Smyth wonders who will continue to pay for it when he is dead and gone. On top of that, grocery shopping and fuel costs piled onto the credit card every month is running the debt up higher. Grandpa suggests taking money out of the Smyth's retirement plan and another limit increase on their credit card will keep them going until they can figure out what to do next. After all "Grandpa knows best." Besides, they get outvoted by their Grandma and children every time.
It doesn't take long before Mr. & Mrs. Smythe realize that if they continue to do this, their entire income will soon be able to do nothing more than pay the interest rates on their debt without coming close to touching the principle. If that happens they will default and be subject to much higher interest rates, making their ability to pay even more difficult. They could even lose their home and subsequently everything in it.
This is how the federal government works.
Principles involved:
- There is a culture of entitlement among the family (Congress) in which Mr. & Mrs. Smythe's income (the Taxpayers) belongs to the family to do with as they please.
- With no real fiscal restraint, there is a lack of responsibility in taking their debt seriously and keeping it manageable.
- No one, perhaps not even Mr. & Mrs. Smythe, have any real understanding of the value of a dollar, or good credit.
- Every purchase, necessities and non-necessities alike, gets hidden in one massive credit card bill and all take on the appearance of a ‘necessity.' When you do this the non-necessary item becomes a necessary debt that must be serviced.
- There is a lack of trust between Mr. & Mrs. Smythe (the income earners) and everyone else (the government) and real concerns about their future.
This is akin to the fiscal mess that we have allowed our legislature to get us into. It is the cost a free republic pays for falling asleep at the wheel. To answer our earlier question Why does Congress want us to believe national fiscal policy is too complex for the layman to understand? Because either they really don't understand what went wrong themselves (in which case they are unsuited for Congress) or they don't want you to fully realize how irresponsible and greedy they have been with your hard-earned tax dollars (in which case they are unsuitable for Congress).
Thankfully most people don't run their families the way we run Congress, we do, on occasion, allow our children and extended family to participate and have some sort of input on family decisions. Often with children it is to make them feel included, get buy-in as well as an opportunity to teach responsibility. Thus, we shouldn't run our families like Congress, but we should force Congress to use the dynamics, values and principles that we have in our families. Clearly the dynamics in the Smythe example above have to change to make Congress more responsible with other people's money.
The Debt Ceiling
If you're like most of us, until recently you have had little or no knowledge of past debt ceiling hikes. We had become accustomed to letting Congress do what had to be done to keep the country rolling along. If it doesn't impact my life, then why spend any mental energy worrying about it. In short, we trusted Congress to act on our behalf and made a conscious decision to ignore Congress until such time as it does impact our lives. This has had some serious consequences. By the time most of us wake up we've discovered we were well down a road from which return may mean nothing short of disaster.
In 1917 Congress passed the Second Liberty Bond Act which fixed the national debt to $49 billion. This allowed a fixed, manageable debt ceiling but enabled freedom to work with those limitations without Congressional intervention. This worked well for the next two decades. In 1940, the country was still in the steep of economic depression. World War was brewing, and enormous government programs like the New Deal (one of many Keynesian inspired ‘stimulus' programs) were hiking up the debt. In order to comply with law, the country had to raise that debt ceiling to continue paying for new programs and prepare for war. Since that time the Congress has changed that debt ceiling 78 times. Five of those times amounted to modest decreases (the last was in 1963) and 73 of those were substantial increases. Overall the debt ceiling has grown from its initial establishment of $49 billion to over $14 trillion - an increase of 29,000%! Just this last decade it has been increased 10 times from just under $6 trillion to just over $14 trillion (240%). Over the course of those same 70 years a modest 4% inflation per year would only yield an overall 1500% increase, well short of the 29,000% increase in the debt ceiling. Why is this so? I suggest it is lack of principles and responsibility.
Reviewing the fiscal dynamics in the Smythe household resulted in several unsavory principles in family budgeting.
- There is a culture of entitlement among the family (Congress) in which Mr. & Mrs. Smythe's income (the taxpayers) belongs to the family to do with as they please.
- With no real fiscal restraint there is a lack of responsibility in taking their debt seriously and keep it manageable.
- No one, perhaps not even Mr. & Mrs. Smythe, have any real understanding of the value of a dollar, or good credit.
- Every purchase, necessities and non-necessities alike, gets hidden in one massive credit card bill and all take on the appearance of a ‘necessity.' When you do this the non-necessary item becomes a necessary debt that must be serviced.
- There is a lack of trust between Mr. & Mrs. Smythe (the income earners) and everyone else (the government) and real concerns about their future.
Because of this behavior America is not only in fiscal deficit, but Americans have a deficit of trust in their government's ability to act responsibly with their hard-earned tax dollars. The 2010 elections saw voters sweeping out the ruling party. It is important to note, however, that this was not a ringing endorsement of the new party that benefited -- it was a sweeping rejection of the existing party and their policies. No one is ready to go back to sleep, and most Congressional Freshmen should realize that their marching orders for the 112th Congress are not unlike the Hippocratic Oath (First, Do No Harm) and second, you are responsible to the voters who put you there, not your party. Those that are unaware of this will be in for a surprise in 2012.
Because most Americans view governmental fiscal irresponsibility as a deep betrayal of their trust, many are now even reluctant to fall by the old Regan mantra of "Trust but Verify," and are ready instead to micromanage Congressional budgetary activities at the lowest levels. There will be heavy scrutiny of every line in any budgetary bill. But to me the lingering question that remains is How do we get back to trusting Congress to do their job with fiscal responsibility? This dichotomy between government and people cannot long stand unless something is done. We must ensure (or impose through the ballot box) the same principles the Smith's used in their fiscally responsible family.
Perhaps the Smythe's clearest option is bankruptcy; however as a nation, bankruptcy can have the severest of consequences and should not be on the table. Another option in this situation is for the Smythe Family to get some type of consumer credit counseling that will negotiate better payment options with creditors, lower interest rates, and force them onto a strict budget. However amusing, sending Congress for consumer credit counseling is not actually a viable option (although it would no doubt set the twitosphere on fire). But forcing those principles practiced by the Smith Family would be a good place to start, and would begin to show the fiscal responsibility required to rebuild the bridges of trust.
So just as credit counselors would force the Smythe Family onto a plan, the American people need to force the 112th Congress into a plan that will build that trust. Unfortunately this will require us to seriously consider raising the debt limit again.
Consider the options. By not increasing the debt limit we will not have enough money to pay our debts and we default on the debts we have. This will likely result in higher interest rates, which will, in turn, force us into making minimum payments over 27 years for a $2000 computer that over the course of time will cost us $13,000. By raising the debt limit we are acknowledging that we are in a position where we have to borrow from Peter to pay Paul. This is extremely bitter medicine for many of us fiscal conservatives to swallow. But we are now in a place where we must consider it to help keep interest rates down and somewhat manageable. But raising the debt ceiling cannot be our only plan, nor should it even be the centerpiece of our plan. We need to look at it as that painful consumer credit counseling tool used to negotiate smaller interest payments until we are back in the black. It should be a tool to get us back on the road of fiscal responsibility.
Which brings us back to those Smith Family Principles:
1. Provide for what is necessary for your family. For our nation these necessities are clearly outlined in the Preamble to the Constitution: Establish Justice, insure domestic tranquility (security), provide for the common defense, promote (not provide) the general Welfare, and secure the blessings of liberty (freedom) to ourselves and our posterity (our children). These are the national necessities as outlined by the Constitution; therefore these are the priorities where we as a nation should be focusing on. I interpret this as ensuring lawlessness does not prevail, securing our borders and maintaining our military posture at reasonable and sustainable levels, ensuring laws work equitably for all persons, and ensuring people maintain the freedoms they are guaranteed elsewhere in the Constitution. To most, freedom also means economic freedom for us and our children. For who is truly free if beholden to a burdensome national debt and/or a prohibitive tax structure? Anything over and above this is the responsibility of the people and the states, who can determine their priorities at that level (see the Tenth Amendment to the Constitution).
2. Responsibly manage your debt. We must honor our debt. The founders felt so strongly about this that after the Revolution and much debate, the US assumed responsibility for each state's war debt. If you do not honor your debt then even getting temporary debt would be economically prohibitive. Temporary debt is almost always necessary for a growing and vital economy. If we do not attack our debt with a serious and sustainable payment plan we will be inviting an economic desert.
3. Provide non-necessary goods and services when you are able to afford them without any impact on your ability to ensure 1 & 2 above. This is the responsibility of the people and the several states and should be outside the purview of the Federal Government (see the Tenth Amendment to the Constitution).
As a requirement to increase the debt ceiling, Congress must present a plan that is fiscally responsible, sustainable, and will result in a predictable payoff of the debt; it must be rooted in recognized constitutional values that all Americans can understand. All government programs not identified as constitutionally required must be paired down to the bone, if not outright defunded. This too will be painful, even for me as I work as a government contractor. But I cannot put my personal needs and desires above the country. Those programs that are constitutionally required can be defined as our national priorities and must be funded, though not lavishly. Our court system and our defense must be smart funded where there is a balance between fiscal sustainability and constitutionally required effectiveness.
Congress has shown us that they cannot act responsibly with other people's money. Thus, in return for national support to raise the debt ceiling, the plan must include programmed debt ceiling reductions over time until the debt is satisfied. There must be no new spending except in case of a national emergency. Taxes should be tied to a fixed percentage of the previous year's GDP. Like millions of American families Congress must learn to work within a budget and not borrow except in times of national emergency.
We have lost our trust in Congress. They must show that they can be trusted again by ceding some of their authority back to the people, where it originates and where most of whom have shown their ability to be responsible. No matter what happens our situation is dire. Painful corrective measures must be taken to force our representatives in Washington to be responsible. It will be a bumpy ride. Some of us may fall out along the way, so prepare now. But as a nation no one can accomplish the impossible better than the American people. For it is the American people that have made this country great, not the American Government.
