Solution must include improvement in income

From the perspective of the average person, I believe watching the debacle in Washington is much like a small child watching his parents in a gut-wrenching divorce fight. He really doesn’t understand everything they are fighting about, but he sure wishes they would find another way to discuss it.

Once heated egos get involved in a fight, the primary goal becomes winning. The basic human instinct of “flight or fight” takes over, and it becomes an issue of survival. Facts or logic are fashioned as weapons with little regard for true meaning or comprehension. Neither side is willing to back away far enough to observe the big picture.

Congressmen and women are not gods. They are not a superior race. They don’t possess all knowledge, and they certainly aren’t at the head of the class in negotiation skills. We elect them in hopes that they are smart enough and principled enough to look out for our best interests. We should require them to help us understand complex issues and even show us where we might be wrong if necessary. Instead, too often we are engaged in a pandering party and more fascinated with the candles than the cake.

The single biggest concern in the fight over debt and deficits is completely lost in all the contention. It is at the root of the issue, and should be the foremost discussion point, but it isn’t, and it probably won’t be. The whole point is wrapped up in a single word – context.

Huge scary numbers are being thrown about by one side like death threats. It is as if a number possesses an evil life of its own and must be slain like a dragon. The other side seems to agree, for the most part, but proposes different weapons for the fight. Both sides ignore the real point.
A number is just a number. It has no practical meaning outside a context. It is the relationship between that number and other factors which can give it meaning. In the case of the national debt, that relationship is between the debt and something called GNP – Gross National Product, our income.

Look at it his way. Suppose you are suddenly aware that you have accumulated $100,000.00 in personal debt. That is a scary number and demands attention. It seems almost overwhelming and you toss and turn for many nights in a frenzied attempt to deal with the fact. Finally, you settle down enough to meet with your financial advisor.

In a calm voice, your advisor reminds you that you make over $500,000.00 per year, so the debt, while of concern, can be managed. In addition, he says, there are excellent opportunities to improve your wealth and reduce your exposure to the debt, but they will require some investment risk.
This scenario isn’t accurately reflective of the U.S. debt situation, of course, but the point is that the debt should be seen in perspective. Twelve trillion dollars is no more important as a figure than one thousand or one hundred trillion. By themselves they are just numbers. It is how they are related to many other important factors which should be under consideration. If our income (GNP) was sufficient, the debt would not seem nearly as menacing.

In an interview with CNN over the weekend, Donald Trump, who was lambasting the president as being responsible for the debt “crisis,” made an emphatic statement. He said, “There is nothing wrong with debt. Debt is good. In fact all great successful businessmen use debt as leverage.” The reporter didn’t have the presence of mind to ask, Why isn’t it good for a country. then?

The Donald was referring to debt in the context of being a manageable piece of the balance sheet. This is the greatest measure of the substance of debt. How does it relate to the overall picture?
Almost no person or business or country has the ability to pay cash for all its needs. First of all, needs are constantly changing. Planning for the future is considered a virtue, and rightly so. As many bases as possible must be covered. At times that requires a promise to pay for the purchase in the future. As long the debt can be covered, everything is fine. If money can be borrowed cheaply, that is reasonable.

Around 2001, the U.S. had some accumulated outstanding debt, but it was very manageable considering that our income (GNP) was more than adequate to service it. In fact, we were in a position to begin paying off some of the principle for the first time. Along came the horror of 911, and everything changed.

Without casting blame, we completely ignored the balance sheet, and wrote a blank check in an effort to strike back at whatever had hurt us. Within a very short time, our debt had increased enormously. Even then, though, our GNP was healthy enough to believe we could manage the debt. Then came the worst financial crash, perhaps, in our history.

Equity, the expected worth of our assets, was discovered to have been falsely manipulated. Value became arbitrary and less and less dependable. The entire economy of the U.S. was very nearly brought down. GNP was reduced to almost zero. The ability to pay off debt was diminished to the point of being questioned for the first time in our history.

Debt, which was a debating point for years, has now become a real threat. It isn’t so much the huge number, though. It’s the difficulty in managing it. Without a healthy GNP, the problem is daunting. Whether the number is five dollars or fifty trillion dollars, the important thing is whether we have an ability to manage it. A balance sheet consists of two sides, and income is crucial to keeping debt in perspective.

In challenging times, the atmosphere is ripe for extreme views and claims. Truth and reality have been challenged and are uncertain. Every circumstance can be shaped into a problem, and solutions abound for every problem. People want some solid ground to stand upon, and finding a dependable footing is difficult.

Strong proposals are being suggested for cutting down the debt, for example, and they must be examined. No doubt many should be implemented. Cutting, alone, however, doesn’t offer a promising solution. If income isn’t improved, cutting has nothing to balance it, and can easily result in a chase downward in an effort to find equilibrium.

Cut five trillion dollars from next year’s spending. Make no other changes. What will happen?

Severe cuts will impact most people negatively. Will the economy improve? It’s hard to make a case for that. The more cuts, the more hits the economy must take. Severe cuts reduce income by discouraging investment and displacing more people from work. Indiscriminant, ”across the board” cuts affect programs disproportionally. Some cuts are more sensitive than others.

Cutting spending in a time of economic crisis makes perfect sense. Yes. There is no argument there.

Making budget cuts without an equal effort at improving GNP, though, is a recipe for long-term misery. It offers no opportunity for real improvement – only containment, and even that is not a given. Some improvement in income is vital.

Context is the key.