It’s Not the Debt, It’s the Spending

Politicians hold the truth dear. So dear, in fact, that they believe that the truth should be used in only the rarest and most extreme circumstances; and then to the minimum extent possible. To a politician, language is a finely nuanced tool that is to be manipulated so that the public may, in turn, be manipulated.

Over the years I have watched politicians twist the English language in ways that only the makers of Silly Putty would envy. But, I have never seen more lies, half-truths, and distortions than during the current debate over raising the debt ceiling,

The biggest lie of all is the statement from the Obama administration that the government will default on its obligations if the debt limit is not increased by Aug. 2^nd. An increase in the ceiling of at least $2.4 trillion would be needed to push this issue past next year’s presidential election and that, of course, is what the White House is demanding.

Default is a very specific financial term. It occurs when a borrower fails to make a scheduled payment (of principal or interest) on a debt obligation.

If the U.S. were to fail to make interest payments on its outstanding debt, borrowers would immediately demand much higher interest rates to compensate them for the untrustworthiness of the federal government. In that case, the interest payments on the $14.3 trillion in national debt could increase overnight from about $250 billion a year to more than $1 trillion (roughly half of all tax revenue would be needed just for interest).

The increased interest rates would flow through the economy affecting mortgages, car loans, consumer credit, and the costs of capital investment. What many people feel is the never-ending recession would become the never-ending depression.

The threat is scary. No sane nation would ever allow this to happen if there were any way to avoid it. The consequences are devastating. That is why it is so tempting to use this threat as a negotiating tool. But, it is a very dangerous negotiating tactic that rests upon misleading the American public.

Each month, the federal government receives about $175 billion in tax revenue and spends about $300 billion. (The difference is made up with borrowed money.) Interest on the debt is a bit more than $20 billion each month. The Secretary of the Treasury, as directed by the President, has complete flexibility in deciding which obligations will be met from the tax revenue on hand, and which must be paid from increased borrowing.

There is language in the 14^th Amendment to the Constitution (Section 4) and supporting Supreme Court decisions that many legal scholars believe require the government to pay its debt obligations before any other. But, even if that were not the case, there are adequate funds available for the government to meet its debt payments and avoid a default even if the debt ceiling is never raised.

Three simple words from the President to the Secretary of the Treasury would reassure financial markets and guarantee that the United States would never default on its debt obligations. Those words are: “Pay interest first.”

But, saying those words would take away negotiating leverage for the real issue at stake: continuing to spend money that the government doesn’t have.

If the American public understood that default was not going to happen, and the only issue was the government spending less, much of the urgency to raise the debt ceiling would be lessened.

If the government were not allowed to borrow new funds, it would have to cut back on planned spending by about 40 percent, starting in August. Spending would have to be cut back by $125 billion for August alone. Spending in September, October, and coming months would also be reduced by a like amount.

With only enough revenue to pay 60 percent of the bills, choosing which bills would be paid and which would not be paid would be difficult, controversial, and highly revealing of the government’s priorities; situations politicians dread.

Slamming on the spending brakes while the train is going full speed would cause many issues and problems. But, none of them would be related to financial default.

The politicians want to link the two issues. They want us to believe that financial catastrophe is imminent unless we raise the debt ceiling so that we can keep spending money. And they want the limit raised sufficiently so that they can continue to borrow beyond next year’s elections. But, in reality, the issues are not linked.

Is this leadership? Or, is it mis-leadership?

Evil Oil

I just filled up my car’s gas tank. Like everyone else, I cringed when I saw the final price. It hurt.

Really, it did. Economic theory discusses a concept called the “pain of paying”. In perfect theory, the reluctance to spend a dollar should be the same for every dollar spent. In practice, some dollars are much harder to spend than others.

When it is obvious that we are giving up something, such as paying in cash, an MRI of the brain at that moment will show that the brain’s pain centers are being activated. (These tests have actually been done.) When the payment is less obvious, such as a credit card, the brain’s reaction is less intense. We know that it is costing us intellectually, but it doesn’t feel like spending, so we don’t care as much.

The government understands this principle thoroughly. That is why the vast majority of all taxes we pay are hidden in something else. Read your phone bill or the small print on your pay stub sometime.

But, back to gas. Gasoline is the only thing we buy that has its price posted in large numbers on almost every street corner. As we pump it into the car, we watch the price race up with each brightly lit penny being added to all the pennies before.

It’s not the swipe of a credit card, or even the rustle of a bill, it is a flashing number that screams: you are paying for this! It becomes the symbol for the unease we feel about our country’s future.

So, it really hurts, and people are reacting to the pain. With no shortage of oil in the world, it seems as if these price increases are coming from out of the blue. People understandably want to know why.

The politicians are quick to answer. It’s all the fault of greedy oil companies and even greedier speculators. If we just find some way to tax and regulate them more, we will all be happy for the rest of our lives. Of course, the politicians won’t bother explaining how raising the cost of producing gasoline will lower its price.

If you pin them down, they will point their fingers toward you. For the iron law of politicians, embedded deep in the DNA of everyone who has ever hogged a microphone is the credo that has been borrowed by the CIA: “Admit Nothing. Deny Everything. Make Counter-Accusations!" Nothing is as important as finding an excuse to raise taxes and increase government power.

What’s really happening? Gasoline prices are the product of a very complex interaction of many different factors, many different types of oil, and constantly shifting demand.

Before looking at those factors, the first, most important, concept is that the price you pay today represents an estimate of what the price will be in the future—not the costs of the past. The refiners, who are the ones who convert oil into gasoline, must replace the oil they use with new oil so that they may continue to make gasoline. They must price the gas at a level that will allow them to buy a volume of oil that will replenish their supply; regardless of what they paid in the past. This is not speculation. It is a requirement to stay in business.

The second important concept to understand is that, after the cost of oil, taxes represent the next largest component of gasoline prices. At current prices, greedy, selfish oil companies make about 8 cents profit per gallon, and the loving, friendly government about 60 cents; 750% more. And, since taxes are based upon a percentage of the price, the government’s take will increase as the price increases.

But, setting taxes aside (I wish I could.). What are some of the more important strategic considerations that drive up the expected price of oil?

The first is that oil is priced in U.S. Dollars, wherever in the world it is bought. In the last three years, the value of the dollar has fallen by about 15 percent. As a result, the dollar has fallen from the second strongest currency in the world, after the British Pound, to the sixth. It is now worth less than the Euro, the Swiss Franc, the Canadian Dollar, and the Australian Dollar. Even if nothing else affected the price of oil, it now takes more dollars to buy a barrel than it did just a few years ago.

Indeed, the outlook for the U.S. economy and currency is so doubtful, that a number of the leading nations are actively considering no long using the dollar as the world’s reserve currency. If and when that happens, prices of every import—including oil—will skyrocket.

Another major consideration is the domestic supply of oil. Now that the technology for extracting shale oil is becoming economically feasible, many estimate that the U.S. has at least a 200 year supply of oil reserves. Natural gas also offers huge, long lasting supplies of energy for the country. But, Washington has steadfastly refused to allow increased domestic production of oil and gas. Because there is a significant lead time for developing these resources, even if the politicians reversed course, it would be years before the increased supply had a significant impact on domestic prices.

That means that the U.S. will continue to be dependent upon energy supplies from politically unstable parts of the world. The Middle East is currently more volatile, and its future is more uncertain, that at any time in living memory. It is far too soon to know if the so-called Arab Spring will sprout beautiful tulips or thorn bushes of hatred and violence. There are certainly many forces in that area that embrace the latter world view.

Neither Washington nor Europe has shown any signs of understanding what is going on in that part of the world, or how to influence it. Leading from behind does not give one confidence that a secure path will be followed.

Imagine if you had to set the price of gasoline at a level that would ensure sufficient supply in future. The currency you use is getting weaker and every indicator is that it will weaken further. There is no realistic increase in domestic production in the future. The oil that is available comes from an area that is unstable and insecure and becoming more so. You have no control over these factors and the politicians who do are ignoring them. What would you do?

That’s right. You’d blame evil oil companies and then go off looking for another good deed to do.

Great Bumper Sticker

Just saw this bumper sticker:

"When everything is free, will I still have to work?"

The World Turned Upside Down

The World Turned Upside Down was a popular Revolutionary War song. Reportedly, it was played as General Cornwallis surrendered some of the finest troops in the world to a rag-tag army of colonials at Yorktown, Virginia, in 1781.

A ghostly whisper of that song could be heard in the background of last week’s minuet over minor reductions in current year federal spending.

The nature of American politics has changed dramatically, and the politicians are the last to see it.

Until WWI, service in the federal government was part time. It was routine for members of Congress and the senior officials of the Executive Branch (to include the President) to take at least six months of vacation each year. Shortly after that, during the Great Depression, politicians learned that they could win popularity by spending other people’s money. For some reason, the electorate never made the connection that the goodies they were receiving from the government were being paid for by money the government had taken away from them.

No political sacrifice is too great to win popularity and stay in office, so the full time Congress was born. After all, if a little bit of spending is good, a lot of spending must be better.

In the decades since, the politicians have made popularity from the spending machine even more productive. They discovered borrowing. Previously, Washington had approached debt as you and I do; a way of meeting a pressing need and something to be repaid. Indeed, the historical view of debt was expressed most clearly by President Thomas Jefferson, when he said:

“I ... place economy among the first and most important of republican virtues and public debt as the greatest of dangers to be feared... And to preserve independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude.”

How old fashioned. Spending more each year than the government receives in revenue allows the politicians to maximize their popularity and let others in the future worry about paying for it. As President Herbert Hoover said, only partially tongue-in-cheek, “Blessed are the young, for they will inherit the national debt.”

The other tactic to hide the cost of government largess from the voters was the semantically brilliant concept of progressive taxation. Just as the Paris mob would shout “death to the aristos” during The Terror, their modern counterparts shout “tax the rich”. And, just as the doomed aristocrats dared not protest for fear of further political prosecution, today’s successful people are equally cowed into silence.

As a result, 40 percent of all federal income taxes are now paid by those in the top one percent of income. Some 98 percent of income taxes are paid by the top 50 percent of wage earners. Half of all Americans pay no income tax at all. Indeed, many receive “rebates” on taxes they never paid. They have no idea of how much government costs and do not participate in paying for it. To them, it is just a huge cookie jar full of never ending free goodies. But, they vote. And, that is just the way the politicians want it.

Unfortunately, that well has run dry. Taking 100 percent of wealthy people’s income won’t make a dent in the financial problems we face. But, expect to hear cries to “tax the rich”. Bad habits are the last to die.

For decades, a style of politics has emerged which is based upon unlimited spending to buy popularity. That spending has created interest groups whose existence depends upon federal spending. Alliances between the politicians and the interest groups have generated campaign contributions that help the politicians stay in office, so they can keep the spending coming. A closed loop of mutual reinforcement has been created that continually pushes spending upward.

This has become so pervasive that politicians of both parties have had to play the game, and build a “bridge to nowhere”, or be defeated.

The cost of spending now and paying later has finally caught up to our nation. In 2006, when Senator Barak Obama declared that raising the debt ceiling was a failure of presidential leadership, and voted against it, the total national debt was $3.5 trillion. Today, with President Obama, the debt is $14.2 trillion, growing at almost $5 billion per day, and scheduled—under President Obama’s budget—to grow to more than $22 billion in less than ten years.

With only a slight increase in interest rates, the interest on that debt could very well crowd out virtually all government spending in the future. We will all pay taxes, but all of it will go to pay the debts that have been incurred to buy votes in the past. The cookie jar will be broken.

Some of the new Republicans understand this. The only way to save the country is to end deficit spending; now, not tomorrow, and begin to pay off the debt while we still can. The rest of the Republicans, and virtually all the Democrats, see no need to change the basis of politics that has worked so well for the last six decades. Spend today and ignore the future has always worked, why won’t it work forever?

Government does not create wealth. The teenage girl who babysits, the boy who mows a lawn, and every other facet of the private sector create wealth. Government consumes what they create.

Members of corporate boards of directors have a legal an ethical standard to exercise their power wisely in the use of their company’s assets. Failure to do so could land them in jail. Members of Congress have no such legal or ethical standard requiring them to be wise stewards of our national resources. They have used their power to further their own careers, not protect the nation.

The debt crisis has turned their world upside down. From now on, the successful politician will be one who is seen as a wise steward not a spendthrift; one who places the needs of his constituents before his own need for power. I doubt that many now in office will be able to make that transition. And, if we lose those who can’t, the nation will be better for it.

Let’s Open Our Eyes

Patrick Henry, who most famously cried, “Give me Liberty or give me death!”, also said: “It is natural for man to indulge in the illusions of hope. We are apt to shut our eyes against a painful truth, and listen to the song of that siren till she transforms us into beasts.”

Illusions are so comforting. As long as we can cling to them, we don’t have to face the unpleasant world—or ourselves. Have you, like me, ever told yourself that a snack is OK because you can cut back on calories later? For some reason, later never seems to arrive and the waist keeps getting bigger.

The more successful you have been, and the more power you have, the easier it is to fall into the trap of doing the easy thing now because you can always fix it in the future. The fly diving for the sweet nectar of the Venus Fly Trap hasn’t the slightest doubt that he will be able to fly away after the feast. Yet, the outcome is always the same.

Politicians are the Grand Masters of living a life of illusion. Regardless of political party, they are men and women who have devoted their lives to creating an illusion about themselves in order to win elections. And, since the payoff in politics is always short term, the most compelling thing for them to do is ignore the future. Grab the instant prize; someone else will fix it down the line.

For many decades, some of the most intelligent and articulate people in the country have promoted the concept that the government is a huge candy bowl. Washington is the source of never-ending free goodies that don’t have to be paid for. And, the country has bought into it.

There is only one problem with this. The United States is bankrupt. The government cannot afford to keep the promises it has made to the American people. This is beyond dispute among those who have taken a serious look at our country’s financial situation. Yet, our elected leaders continue to shut their eyes to this painful truth.

Before Libya pushed financial news off the front pages, much was being made about the dramatic showdowns between the Republicans and Democrats in Congress. The former wanted to cut $61 billion from this year’s budget. This amount represents 1.6% of the total spending projected for the year, and only 3.7% of the projected budget deficit. The median (half above and half below) household income in the U.S. is $46, 326. A spending cut of this magnitude would be about $740 for the year for a family. Most of us have done more than that, but the mere prospect makes swooning politicians reach for the smelling salts.

The Democrats are using every weapon in their formidable arsenal to resist those cuts by portraying them as extreme and irresponsible.

Neither side is serious. The debt is rising by about $5 billion a day, or about $3.5 million a minute. In that context, the $61 billion that the Republicans have set as a goal represents only about 12 days of borrowing. If the Republicans succeed, the national debt by the end of September will approach $16 trillion. If the Democrats succeed in avoiding any further cuts, the national debt by the end of September will approach $16 trillion. The difference in their positions, in relation to the total debt, is about 3/10,000,000.

Today, the U.S. has some $14.2 trillion in public debt. (This does not include the more than $100 trillion in future year financial obligations it has assumed.) President Obama’s proposed budget projected that the public debt will rise to some $19 trillion by 2021. Just a month after making that projection, the independent Government Accountability Office estimated that the debt would be $2.7 trillion greater than forecast by President Obama; or, almost $22 trillion. (Historically, every single five and ten year forecast of the growing debt has been low. The Congress always spends more money than expected. I believe that, if we continue on our current path, the debt will be much more than $22 trillion.)

But, let’s assume that the forecast is right this time and the debt will be only $22 trillion in ten years. The interest payment, at the current weighted average rate, would be about $420 billion in 2021. This would be only slightly less than the amount projected to be spent on all non-defense discretionary spending.

Rates are almost certain to rise from today’s historic lows. The average interest rate on public debt over the past 30 years has been almost four times greater than it is today. If rates rose to that 30 year average, we would pay almost $1.6 trillion just for interest on the debt in 2021. That is equal to the total amount projected to be spent on all discretionary spending in 2021, to include defense and security.

In short, over the next ten years, we could shut down every single cabinet agency (including defense), close every single government program except entitlements, fire more than 4 million civilian and military personnel, and still save only enough to pay interest on the debt.

But, interest rates are likely to be much higher than in the past. Inflation is beginning to come back. Oil and food prices are rising dramatically, and like Ole Man River, the Fed just keeps rolling (printing money) along. If inflation drives interest rates to the levels seen in the late 1970’s, then the amount needed to service the public debt will approach the total projected tax receipts.

Under this plausible scenario, we could eliminate all government activities across the board, including entitlements, and still collect only enough taxes to pay interest on the debt.

The answer isn’t to raise taxes. We can’t raise them enough without destroying the country. We can’t print more money without igniting hyperinflation. The only answer that works is to cut spending. We must stop increasing the debt. That means no more budget deficits. Starting now. Not sometime in the future.

I don’t know what the future will bring. But, I do know that our country cannot survive with the federal debt burden that we already have. Continuing to increase it merely drives more nails into the national coffin.

The Obama Administration ignores this and projects deficits and increasing debt as far as the eye can see. The Democrats cling to their illusions. The Republicans, on the other hand, talk about responsible change but, so far, have not done anything serious about it.

This is not unique to America. Throughout history, whenever a country has faced an overwhelming debt burden, the politicians have acted as if they are somehow exempt from the consequences of their actions. They continued to tax, borrow, and spend their way into a financial collapse of their country.

There is an old story about the sinking of the Titanic. When the ship hit the iceberg some chunks of ice fell onto the ship’s deck. Some of the wealthy party goers, confident that no harm could ever come to them, reportedly broke off bits of the ice and used it in their drinks. They partied while the ship sank. I don’t know if that is a true story. But, if it is, the tuxedoed gentlemen and their ladies must have been politicians.

It may be good political theater to appear to be fighting. And, the tinkle of a bit of iceberg in one’s whiskey might be charming, but the ship is sinking and those we elect to represent us don’t act as if it is a real problem.

Unless You Know Where You Are Going, You Can’t Get There.

In 1992, Vice Admiral James Stockdale was Ross Perot’s running mate for President. In the Vice-Presidential debate he began his comments by saying: “Who am I? Why am I here?” He was greeted with laughter and near universal scorn in the media. They opined that anyone so naïve as to ask these questions clearly wasn’t qualified to be Vice President. A professional politician would never expose himself to such a question.

As usual, it was the media that was clueless. Stockdale was not a politician. He was one of the most highly decorated naval officers in history. As the senior POW in the infamous Hanoi Hilton, he survived seven years of torture and near starvation. In the process, he set an example of character, integrity, and leadership that gave hundreds of other POW’s the strength to survive. He was awarded the Medal of Honor for his courage in captivity.

Even more important than a medal, however, was the impact he had on those who followed his example in prison. They took those lessons home with them and, as changed men, had an impact on others. No one will ever know how many thousands of people today are stronger because of the character of one man whose body was broken, but whose spirit was untouched.

Stockdale was able to do this because he had asked himself the questions: “Who am I? Why am I here?”

Many of us are as clueless as the media’s understanding of Stockdale.  Business text books say we should have a mission statement. Most organizations ignore the need for it. Many executives dismiss it as a meaningless bureaucratic exercise. As El Bandito said in the “Treasure of Sierra Madre” when he claimed to be a policeman, “We don’t need no stinking badges!”

Other organizations go through the motions and produce a mission statement that is so general that it doesn’t say anything and that everyone ignores. They merely prove that the cynics are right. They waste the organization’s time and delude themselves.

No one would think of getting into a car and start driving without knowing where they are or where they are going. Yet, that is the way they run their organizations.

Leadership is not possible unless you can bring people together to work for a common purpose. An effective mission statement that is actually used within the organization is one of the single most important tools on building an understanding of who are we and why are we here. It builds a common sense of purpose. It establishes a common standard of behavior that allows the organization to evaluate its effectiveness.

Without a common sense of purpose, an organization can never excel. Without it, an executive becomes a herder of cats and not a leader of a team.

Below is the mission statement I use for my own organization (a consulting firm). Like everything, it could be improved, and we are always seeking to do so. It has become an important communications and team building tool. I urge you to look at what you are doing in your own organization. If you haven’t invested the effort to answer Stockdale’s questions, how can you ever reach your full potential?

Here’s my mission statement:

The Austin Group exists to support its clients. Our mission is to take a genuine interest in our clients, understand their objectives, and meet or exceed their expectations. We dedicate ourselves to these values: 

• For our clients, we will work hard, provide superior services on a timely, effective, and efficient basis, and maintain the highest standards of professional integrity.
•  For our office, we will foster an enjoyable working environment, based on open
  communication and mutual respect, and will encourage initiative, innovation, teamwork, and loyalty.

Only in Washington

Politicians speak English. Sort of. They use the same words we do, but give different meanings to them. For example, increasing spending by less than the amount forecast is called a budget cut. You and I, seeing that the amount of spending has increased, would call it a spending increase. How silly of us not to recognize that the increase is really a decrease and a bold act of political leadership.


In the 2012 budget released this week, President Obama proposes to freeze federal non-defense discretionary spending for five years. He claims that this will “save” $400 billion in spending. But, remember, this is Washington Politico-Speak. Actual spending will not be reduced in spite of the claims. It will remain at unprecedented levels. This category of the budget has increased by almost 50 percent in the two years the Obama Administration has been in power.

This is like a man who begins to eat two desserts after every meal. His doctor tells him that the weight gain is unhealthy and that drastic action is needed to avoid catastrophic problems. The man then announces that he will freeze his eating habits at two desserts per meal and not increase to three deserts. He then calls this a bold diet and claims that the extra weight that the third dessert would have caused is really a weight loss.

Only in Washington . . .

The media is now consumed with the looming fights over entitlement spending. Bringing entitlements under control is essential to long term financial health for our country. The debates on how to do this will take time as a national consensus emerges. But, significant actions to reduce the deficit and resulting debt can be taken in the meantime.

Almost all of the record deficits of the last two years has come from the huge increase in discretionary spending, not entitlements. For more than two centuries we grew and prospered without our government eating two desserts after every meal. The current level of spending is an aberration, not the norm.

Huge savings, simply by returning to the levels of discretionary spending that existed just two years ago, are available if we use American English to address the problem, and not Washington English.