Saturday, March 12, 2005

The National Debt

Seems that the US and many other countries are wrestling with debt. I am taking a course in income tax and it talks about three ways to eliminate debt, and the pros and cons of each.

Retire Debt: Issue enough money to pay off the entire debt.

Con: It will cause economy to collapse by runaway inflation.

Increase Taxes: Bring in more revenue to pay down the debt.

Con: The people might revolt.

Reduce Government Expenditures: Use the excess saved to pay down the debt.

Con: What programs get cut and do they have enough power to vote you out? The most vulnerable programs are for those people who do not have a voice.

It never mentions a fourth option. From what I gather, governments run up a deficit because they spend more than they bring in, so they have to borrow the balance from private banks at interest. A majority of tax revenue today goes to maintaining interest payments. It is the single biggest expense.

My idea is simple. Restrict a government’s ability to borrow. If a government needs more money for a project it should ask the people it taxes for the money, not borrow it. Unpopular programs would never receive funding, as often a government will borrow the money to fund something just because they don't want to be held accountable. The government borrows money from banks based on our ability to pay, so shouldn't we have a say? Governments should only be allowed to borrow in the case of emergencies.

Also there is an attitude in government that if they bring in X amount of dollars in revenue, they have to spend X amount of dollars. They treat the money like it is burning a hole in their pocket. It should be that some money should be held in a reserve (if it isn't applied to the national debt) for emergencies so the government doesn't have to borrow. A rainy day fund if you will.

So is this workable? I think yes.

To pay off the debt you already owe, it could be legislated that every annual budget returned has to make a minimum payment on the debt (the principle portion in excess of the interest portion). A small tax could be instituted (1%-2%) that goes solely to provide funds to make this principle payment. And with the government’s ability to created new debt restricted by law (either by borrowing from banks or issuing T-Bonds) the debt will eventually become a bad memory.

I think the problem stems from the lack of accountability when an administration leaves the reigns of power. They can run the debt sky high, but after two terms it is no longer "their" problem. Then the guys that come in after are left with an option to either A) clean up the mess by making a lot of people very unhappy, or B) borrow or issue bonds for 8 more years and pray that nobody notices. Most administrations want a second term so they'll most likely chose B.

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