I like to listen to one of the local radio stations periodically when I commute. Those 40 minutes give me the opportunity to hear about local opinions on local issues and national issues. One morning, the topic of conversation on the morning show was about the national debt.
There was a lot of great conversation and the talk show host summed up the reason of the national deficit in one sentence, “The National Debt Is A Reflection Of Our Society.” It's a simple response and it got my wheels turning and asking one question, “Why?”
It's really easy to solely focus on the national debt as being the problem of federal government, but have we (as individuals) encouraged the debt to increase?
Whether we realize it or not, the national debt is personal. Take the American Debt Jubilee idea for instance that could potentially forgive entire loan sectors from student loans, auto loans, and car loans.
It has become more personal each year since 1958 when the national debt started increasing on an annual basis. There are many factors for the increase, and a great way to see what makes up the national debt is this US Debt Clock.
What Countries Don't Have Debt?
A national debt isn't exclusive to the United States, apparently, only five countries in the entire worlds don't have debt:
- British Virgin Islands
With the exception of Brunei (population 423,196), the remaining four nations all have a population of 35,000 or less.
Unfortunately, my local county with 53,000 people is in debt along with virtually all U.S. counties and parishes.
How Does the National Debt Affect Me?
Some of you might be wondering, “How does the national debt affect me?”
For starters, we elect government officials to positions of authority at the local, state, and national levels. Those elected officials were chosen to represent & promote the interest and general welfare of their constituency.
Running a government requires people and money. Unfortunately elected can't make laws, defend the country, and singlehandedly fulfill their campaign promises. So the party in charge at the time creates a department or sub-agency to do the elected leaders bidding in the interest of the constituents, young adults enlist in the military, and other private corporations produce goods and services the government needs.
This means the government needs to collect enough money in taxes to not incur debt. If this isn't possible they raise taxes, borrow money from other governments, or digitally create some more with the fiat currency printing press owned by the Treasury.
Each person has different needs from government. A millionaire can probably care less about the food stamp program, but wants low capital gains taxes. But somebody who has recently become disabled or laid off, is going to look for any financial assistance available. A city slicker riding the subways could probably care less about ethanol subsidies, but that farmer might have equally discerning feelings for mass-transit.
Everybody wants something different from government and their elected representatives, so urban and rural congressmen are going to support measures that favor their local constituents. If they don't, the voters will replace them with somebody who does at the next election.
It's a vicious cycle that's been going on since 1776. But, it's accelerated in the post-World War II era (in my humble opinion).
So it only makes sense that government has grown in size since July 4, 1776 as America has become more populated and wealthy.
James Carville probably said it best, “It's the economy, stupid.”
Think of how many government agencies have been created in your lifetime?
Let's look at a couple examples:
- Social Security Administration (Established 1935)
- Environmental Protection Agency (1970)
- Department of Education (1979)
- Department of Homeland Security (2002)
- Consumer Financial Protection Bureau (2011)
Everybody reading this post will have different opinions on the various agencies listed above (and the multitudes not listed), but did you know how recent some of these agencies were created?
How did our grandparents receive an education before 1979 or how did people make smart financial decisions before 2011?
Miraculously, life existed before the creation of numerous government entities. Edison & Einstein didn't need a federal Department of Education to invent the lightbulb or atomic energy--they just did it!
Is Government the Answer?
Our government has done some great things like maintaining a strong domestic military that has prevented foreign invasion since the War of 1812 and passing the Civil Rights Act in 1964.
But is Government the answer to all our problems? I think it's great that low-income families can receive food stamps and assistance in times of need, certain work laws are enacted for safety and keeping children out of factories, and that people with pre-existing conditions can have health insurance.
But how much is too much?
At some point, families & local organizations –religious and secular– need to step up and reclaim an increased role in charity. People's first instinct in 2018 is to go to the local, county, state, or federal government for aid first.
As government grows and needs more tax dollars, yours and my tax liability increases and that ultimately means you get to keep less money in your wallet to spend as you want. Uncle Sam always gets the first portion of each paycheck and the more he needs, the less you get to take home. I like big checks.
Government is necessary (I can't negotiate foreign trade deals or fund a Navy), but a firm line needs to be drawn that defines personal responsibility.
Whatever Happened To Penny Candy?
Has somebody ever told you that when they were a child, a pack of baseball cards cost a nickel & you could be a single piece of candy for one penny? Me too.
We see the impact of the national debt most visibly in the everyday prices of items we purchase on a daily basis. Some of this is due to inflation as a result of the national debt, but other expenses like employee benefits.
How many 99 cent stores do you see any more or have they all transformed into dollar stores?
I recommend an excellent book series to teach your preteen (or your inner child) about the disappearance of penny candy.
But until you read that riveting book, let's review the basics:
- Every government in the history of the world only makes money by collecting taxes
- Without enough money, any government, business, or household will collapse
- Governments can raise taxes, print money, or borrow money to pay expenses
- Businesses cannot force anybody to buy their product (opposite of taxes) & no bank will lend money to a business or person that has no chance of repaying the loan.
If you were $21 trillion in debt like the U.S. Government, do you think a bank would loan you $20,000 to buy a new car? Probably not. They have 21 trillion reasons to tell you No.
So let's look at why gumball machine takes several quarters instead of a few pennies.
In simple terms, the dollar doesn't go as far as it used to. It takes more dollars to buy something our grandparents bought for less. It's inflation 101, too much money chasing too few goods.
While we have more gadgets & bigger houses than our grandparents or great-grandparents, we have arguably less disposable income than they did. Looking at the picture of the iconic Chevy Suburban above, automobile prices are crazy insane.
According to Hemmings, a 1955 model would cost about $18,500 in today's dollars. Back then it would list for $2,300. A basic 2016 model starts at $50,000! While automobile technology & reliability has greatly progressed in 60 years, that is a price difference of $31,000. That could pay off student loans or be a down-payment on a house.
That Pesky Thing Called Interest.
This is where the national debt gets personal– microeconomics-personal. Loan Interest.
We have all experienced the “joy” of paying interest for money we have borrowed whether it is student loans, home mortgage, or credit card debt.
In the 20th Century, the United States went from being the “World's Largest Creditor” after World War II to the “World's Largest Borrower” at the close of the century. We're the “richest” nation in the world, but is it all a fantasy?
Those nations aren't necessarily lending us money out of compassion. It comes at a price. Although I wasn't able to find any recent statistics, we pay a lot of money in interest to nations like China. Yes, that country that makes our smartphones, computers, toys, housewares, and certain food products. Not only do we run a trade deficit with them as they ship finished goods across the ocean for us to buy, a certain percentage of our taxes pays their government for interest on money they have lent to us.
That is money that could be addressing our current woes like repairing our bridges & roads, updating our electrical grid, or addressing the upcoming shortfalls in Social Security & Medicare.
The same applies to interest payments on personal debts. Banks enjoy receiving interest payments (it's how they stay in business & reward savers) but that money could help you pay off your debts quicker or buying organic produce instead of conventional produce for once. For a quick refresher on how two people can pay different interest rates on the same product, it boils down to your credit score.
As any debt gets bigger (federal, state, or personal), you have to pay more in monthly interest payments. 5% of $1 million is significantly larger than 5% of $250,000. If you can only pay a fixed amount each month (say $10,000), more of it is going towards interest than principal. You might die before your debts get paid off if they are too high.
That is the case with the U.S. debt. I wasn't even a thought in 1958, the year debt has increased annually ever since. What started off small & manageable has transformed from a snowball to an avalanche. And not the good ones that Dave Ramsey talks about.
It has increased over the guidance of several generations with good intentions. The can has been kicked down the road by presidents and congressional leaders from both parties. We pay a little more each year in interest until the day of reckoning finally comes.
On a personal level, we call it personal bankruptcy.
Is There A Reset Button?
Can we, as a country, press a reset button that would magically erase the debts of every nation and household? I don't know if one exists. Sadly, the world has winners and losers. Debt is no exception to the rule. Individuals, corporations, and nations will always mismanage money.
I don't know what will happen when somebody finally does try to push the reset button. I can imagine it won't be pretty. If they try to reset us back to 1958, Elvis would still be in the Army and I would be typing this on a typewriter instead.
That would be a culture shock & who knows what the nation would look like once everybody adjusted to the new “norm.”
What Should We Do Instead?
We need to avoid the reset button from getting pushed. If it does, it's us (not the lender) that needs to push it. We are the wealthiest civilization in the history of the world, yet we are up to our eyeballs in personal and government debt.
Governments are increasingly having to shift money that was previously used for infrastructure, etc. (programs that created jobs & made everybody's lives better) to paying debt interest & social programs like Social Security to avoid financial insolvency. Our tax dollars are victims of the “Law of Diminishing Returns.”
The problems just don't end at the federal level. States & community governments have their own budget woes (Chicago, Detroit, Puerto Rico). Locally, my county charges a “facilities” tax on all new construction at $1 per square foot that solely goes to the school system–this tax was only implented five years ago. We built a new house, and this tax instantly increased the price of our house $3,000, and we don't get any more square footage or nice amenities like granite countertops or a fridge with a built-in tv screen.
Drain the Swamp
To borrow a phrase from the Trump 206 campaign, we need to “Drain the Swamp” locally and nationally. Just like companies bring in new CEOs to slash costs, us constituents need to hold the elected leaders accountable. The only problem is that we can't agree on where to cut and everything grows.
Cuts need to be made somewhere. To pay off personal debt, you have two options:
- (1) make more money and put the new money towards debt or
- (2) reduce monthly expenses and put that money towards debt payments
If a person is in debt, they won't be able to buy a new car or fancier things in life when the time comes. Instead, that money will be going to a bank. The bank will be getting richer, but you won't. If money isn't being spent, government tax revenues fall. It's a vicious cycle.
My proposition is the size of government needs to be reduced. This is a solution that our legislators cannot agree on for how to cut it, and that is a discussion for a different day. Do we cut social programs, military programs, or both? Each person has different opinions & our debt keeps rising in the process.
The humongous debt didn't happen overnight & it won't get paid off overnight. Household Debt works the same way. Before it becomes irreparable, the personal decadence needs to end (so you can live with financial freedom again in the future).
So until more households are able to get rid of their own debts, like the $1.2 trillion student loan debt (before getting a real job) for starters, our nation is on the path for financial ruin.
We cannot expect the government to clean financial house if us, as a society, won't take hold of our own finances first!
Thanks For Reading,
Josh founded Money Buffalo in 2015 to help people get out of debt and make smart financial decisions. He is currently a full-time personal finance writer with work featured in Forbes Advisor, Fox Business, and Credible.