Fixing our country’s finances (finally)

Overview

So here’s the story:

We’re got a big problem: decades of irresponsible spending and kicking the can down the road have put the U.S. on the road to fiscal ruin. If we don’t make major changes soon, the country is headed for years of pain — big cuts to government programs people count on, a sluggish economy, and living in a vulnerable position where we might not be able to borrow money for emergencies like paying for a war.

We’ll have to make some tough choices, but it’s key that we do so in order to avoid crisis and make sure our kids and grandkids have the same opportunities as us.

Keep clicking to read about how we got here, what the options are moving forward, who’s out there fighting to make things right, and how these issues are affecting real people today.

  • D.C. politicians are addicted to spending money they don’t have.

    For a long time, countries have relied on issuing debt to pay for unexpected, costly events like a massive war. This was a little risky but basically not a big deal because when the borrowing need was over, the country would pay back their loans. It worked.

    Over time, politicians started to get used to this practice — borrowing from citizens and other countries (and sometimes even from its own programs with lots of money in the bank like Social Security), thinking it wasn’t a very big deal to spend more than they collected in revenues even during times of peace and to fund normal government activities like health care programs.

    This became commonplace in the U.S. over the last few decades.

    As shown in the graph below from the Washington Post, we’ve been spending way more than we collected in taxes, and borrowing to make up the difference:

    Screen Shot 2016-08-15 at 1.54.01 PM

    Today, we have a staggering debt of $19 trillion.

  • Our debt level has reached dangerous territory.

    An important aside: One way to think about debt is in absolute terms ($19 trillion is a lot, obviously) but another way to think of it is how big or small it is as a share of the economy, because that indicates how easy or hard it will be for the country to pay the debt back (and how overwhelming or not the interest payments on the loans are). In other words, $1 trillion in debt is a much bigger deal for a country with a $0.5 trillion GDP (when the debt-to-GDP ratio would be a staggering 150%) than a $1 trillion debt would be to a country with a $13 trillion GDP (a much lower 5% debt-to-GDP ratio).

    There’s no magic formula regarding the exact right or wrong level of debt, but we have a few good examples of what works and what doesn’t.

    The historical debt-to-GDP ratio in the U.S. has been around 40% — and that’s worked pretty well for the U.S in terms of economic growth and interest rate levels. When Greece’s debt starting spiking above 100%, the credit markets freaked out and it became much harder for them to borrow.

    So, the problem for the U.S. today is not just that $19 trillion is a lot of debt.  It’s that a debt burden of that size is a whopping 150% of our GDP — reaching Greece-like levels.

  • We're already on shaky ground, and it's about to get way worse.

    Now for the really bad news.

    After World War II, politicians passed a bunch of laws that when you stop and think about it get government backwards. Instead of saying, we’ll decide how much we’re willing and able to collect in tax revenues and then divide that up on programs we deem important, they passed laws that spend money based on a formula.

    Take Medicaid for an example. The amount of money we spend is based on how many people meet eligibility criteria, not on how much of a budget we have.  So, when the cost of the service we’ve promised to provide goes way up, or more people become eligible, overall spending automatically goes way up too.

    There are a few big programs that work like this: Medicare, Social Security, food stamps, etc. the bottom line is that they’ve gotten increasingly expensive in recent years and the problem is about to get way worse.

    The reasons vary: more people aging and becoming eligible, healthcare costs going way up . . . But the upshot is, we have laws in place that we know are going to cause spending to skyrocket.

    As shown below, debt is projected to spike to 160% of GDP by 2040:

    Picture1

    To be clear: This is just what will happen if we change nothing, forget about how much worse it would get if we had a big unexpected cost like a new war to fight or another massive recession.

  • If we change nothing, we're looking at a bleak future.

    Once again, when debt gets past a certain level, things get bad. So if we change nothing, we’re looking at painful years of austerity and ultimately insolvency.

    Big problems we’re almost certain to face along the way?

    We’d likely see increased borrowing costs so we’d be spending trillions of dollars on interest and not on other priorities such as education or transportation. The chart below from the House Budget Committee puts this in perspective; if we do nothing, in ten years we’ll be forced to spend almost ten times as much on interest as on education — which isn’t good for anyone:

    Screen Shot 2016-08-15 at 5.21.11 PM

    Additionally, we’d also likely lose the ability to borrow money because lenders would say forget about it. That would get really ugly really quickly.  It would likely mean austerity, high taxes, inflation, and being in a vulnerable spot where if we needed to fund something like a war we might not be able to.

    (See this document from the Peterson Foundation for a helpful list of all the bad things that can happen if we don’t address the debt)

    One other thing.  Some say we can just grow our way or tax our way out of the problem.  But that’s a false argument.  The costs we’ll face due to exploding entitlement programs will be so great we won’t be able to do that.

    Politicians have ignored the problem for decades, but it’s clear we can’t afford to do that any more.  

  • This is a predictable crisis that politicians have been unwilling to confront.

    One of the craziest parts of this whole situation is that this problem isn’t a surprise.

    Politicians have been talking about it for a while and have known that we’re going to to confront the problem because, as the director of the Congressional Budget Office makes clear below, the future path of our debt is unsustainable. Unfortunately, they’ve merely kicked the can down the road.  

  • Modernize entitlement programs

    Since they take up such a large part of the budget, and are going to so heavily contribute to future spending growth (see this from CBO), it’s going to be nearly impossible to get off the path to bankruptcy without reforming entitlements.  

    There are a number of ways we can bring down entitlement costs - including improving the way we fund Medicare, making Social Security solvent, and doing what we can to bring down healthcare costs.  

    One specific example that's often put forth as a partial solution to the trillions of dollars in unfunded liabilities we'll face over the next few decades?  Gradually raising the eligibility age for Social Security and Medicare; benefit payouts would begin later and people would stay in the workforce longer, boosting tax revenues. But doing so would have important implications for those nearing retirement.  (Read the full CBO study here, and CBO's updated estimate of the budgetary effects of raising the Medicare eligibility age here.)

  • Stop out-of-control spending

    While entitlements are expensive, we spend a lot of money on other things too.  So we can make some progress in solving our long term debt problem by cutting spending in other areas of government -- for example excessive spending on agriculture programs, education, etc.

    Some helpful compilations of suggested spending cuts?

  • Fix the broken tax code

    Replacing parts of our broken tax code with policies that encourage innovation and make it easier to do business in the U.S. would grow the economy, causing our debt burden to shrink as a percentage of gdp, and potentially even grow revenues, making it less of a strain to pay back what we’ve borrowed.  

    However, it’s important to note that it would be a tremendous burden on the economy and on American families to try and solve the debt problem with revenues alone.

    CBO found that if we set a goal over the next thirty years of keeping the debt-to-gdp ratio at its current level of 75%, we would have to raise revenues by 9% (about $330 billion in 2017) each year for thirty years.  

    To solve the debt problem solely with revenue increases, we'd have to raise taxes by roughly 10% every year for the next 30 years.    

    So, it’s key that spending cuts are a primary part of any plan.

  • Paul Ryan
    First made his mark on Capitol Hill by ringing the alarm bells on the debt crisis (and presenting a plan to deal with it)

    In this Nov. 5, 2015, photo, House Speaker Paul Ryan of Wis. smiles during his news conference on Capitol Hill in Washington. Late nights dealing with scores of amendments on the House floor. An invite to the famously staid Senate majority leader, Mitch McConnell of Kentucky, to appear at an open mic session. Welcome to Ryan’s House. A week into his tenure, the new speaker looks determined to make good on promises of opening up the House of Representatives to participation from all lawmakers.  (AP Photo/Pablo Martinez Monsivais)

    “We need a clean break from the politics of the past. We have a debt crisis staring us in the ...

    “We need a clean break from the politics of the past. We have a debt crisis staring us in the face.”
    Why They Matter

    From his official website bio:

    Born and raised in the community of Janesville, Paul Ryan is a fifth-generation Wisconsin native. Currently serving his ninth term as a member of Congress, Paul works on many important issues affecting Wisconsin residents and is an effective advocate for the First Congressional District. 

    In October 2015, after then-House Speaker John Boehner retired from Congress, Paul was elected House Speaker. A committed conservative and public servant, Paul has spent ...

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  • Maya MacGuineas
    Independent budget maven with real ideas for getting our fiscal house in order

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    “While addressing the debt will be difficult, succeeding in implementing sensible reforms will provide immense upside for the economy and ...

    “While addressing the debt will be difficult, succeeding in implementing sensible reforms will provide immense upside for the economy and nation.”
    Why They Matter

    From her bio at the Committee for a Responsible Budget:

    “Maya MacGuineas is the President of the Committee for a Responsible Federal Budget as well as the head of the Campaign to Fix the Debt. Her areas of expertise include budget, tax, and economic policy. MacGuineas testifies regularly before Congress and has published broadly. Once dubbed “an anti-deficit warrior” by The Wall Street Journal, MacGuineas comments often on broadcast news and is widely cited by the national press. In the spring of 2009 MacGuineas did a stint ...

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  • James C. Capretta
    Seasoned budget expert fighting to shake up the process

    img-jamescaprettahires_110809412414

    “The fundamental problem with the nation's finances . . . is the skyrocketing expense of entitlement programs.”

    Why They Matter

    From his AEI bio:

    James C. Capretta is a resident fellow and holds the Milton Friedman Chair at the American Enterprise Institute, where he studies health care, entitlement, and US budgetary policy, as well as global trends in aging, health, and retirement programs. In 2015 and 2016, he directed two major studies: one on reforming US health care according to market principles and consumer choice, and the second on reforming major federal entitlement programs to promote greater personal responsibility, focus limited resources on those most in need, ...

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  • Peter Peterson
    American mogul looking out for the next generation

    Peterson.jpg

    “I say that when you have limited resources, it’s not moral to slip the check to your own children.”

    Why They Matter

    From his bio at the Peterson Foundation:

    “Pete Peterson is founder and chairman of the Peter G. Peterson Foundation, a non-partisan organization dedicated to raising awareness of America’s long-term fiscal challenges and promoting solutions to ensure a better economic future. Pete established the Foundation in 2008 and he continues to lead its work to put America on a fiscally sustainable path.

    Pete’s distinguished and far-reaching career spans more than five decades, including contributions and accomplishments in ...

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  • Tom Price
    Former surgeon currently holding the gavel at the House Budget Committee

    Rep. Tom Price, R-Ga., center, flanked by Rep. Mike Kelly, R-Pa., left, and Rep. Mark Meadows, R-N.C., speaks during a news conference on Capitol Hill in Washington, Friday, Aug. 2, 2013, speaks about his bill, the "Keep the IRS Off Your Health Care Act," which the House passed today and targets President Barack Obama's health care overhaul. The bill aims to prevent the Internal Revenue Service from implementing any part of the health care law. It is the 40th time the Republican-controlled House has tried to block the Affordable Care Act, popularly known as Obamacare.  (AP Photo/J. Scott Applewhite)

    “It is our time and our responsibility to bring an end to the broken ways of Washington.”

    Why They Matter

    Tom Price is an accomplished orthopedic surgeon, former congressman, former state legislator, and now the new Secretary of Health and Human Services. He’s been rolling out alternatives to Obamacare since before Obamacare was even passed, and he’ll be the point man on undoing Obamacare regulations and running the transition to a better health care plan.

    Read more about him here.

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  • Anti-Debt Group Supports House GOP’s “Better Way” Tax Plan

    The non-partisan group Fix the Debt this week came out in support of a new tax reform plan introduced by House Republican leaders. The group, which believes the growing national debt threatens America’s future and must be curtailed, called attention to the necessity of such tax reform in a recent …

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  • Government Transparency in Ohio Provides Model for Other States

    Ohio Treasurer Josh Mandel has been leading the fight for government transparency for quite some time now. Luckily for taxpayers, he has won. Mandel’s initiative, a public website called OhioCheckbook.com , is restoring Ohioans’ faith in the fiscal future. Hopefully other states will take notice and follow his lead in developing a transparent relationship …

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  • House GOP Looks to Curtail Automatic Spending, Alleviate Debt

    (House Budget Committee Chairman Rep. Tom Price, R-Ga. / Photo: AP) You don’t need a political science education to understand that the rallying cry of many this election season has hinged upon money. Namely, people are mad because they don’t know where their tax dollars are going. This week, Congress …

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  • This Transparent New Tool Could Democratize Policymaking

    A quiet revolution in public policy happened last week. So quiet, in fact, you probably didn’t hear about it. But the launch of the American Enterprise Institute’s Open Source Policy Center (OSPC) could fundamentally reshape how Washington crafts the policies that impact jobs and wages across the country. OSPC is …

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  • The Mythology of Liberalism: The Deficit and the Debt Don’t Matter

    Alongside family, community and faith, America’s success is rooted in human capital. By rewarding the risk of entrepreneurial spirit and advancing the cause of social mobility, American society has empowered individuals to make humanity happier, healthier and safer. Regrettably, today, U.S. capitalism is under attack from liberals who propose ever-expanding …

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