The week of Oct. 30 through Nov. 3 provided a significant amount of good news on the economic front for those of us in the United States.
After a poor three-month run from August through most of October, all major U.S. equity indices (Dow Industrials, S&P 500, NASDAQ) were up between five and seven percent for the week. In addition, the Labor Department’s latest job report for October showed an increase of 150,000 jobs for the month, a less-than-expected increase and a much slower increase than in recent months, showing a cooling in the job market which may indicate inflation is also cooling. Other good news included the Federal Reserve leaving rates at their current level rather than another quarter-percent increase and oil prices stabilizing around $80-$85 per barrel. All of this good news, combined with solid third-quarter earnings reports, provides hope for a “soft landing” of either no recession or one that is short and/or shallow.
However, despite all of this good news, there is an ominous warning that only remained in the headlines for a short period of time last week. On Nov. 1, the U.S. Treasury Department announced plans to accelerate the size of its bond sale auctions to handle its heavy debt load and the rising costs of financing that debt. Since 1993, our national debt has grown from $4.23 Trillion to over $33 Trillion with significant increases under every administration, Republican or Democrat. The concern has become greater as the cost of servicing the debt has continued to grow. When interest rates were very low, the cost of servicing the debt was relatively low as well. However, as interest rates have risen, so has the cost of servicing the debt, with the U.S. now spending over 9% of its revenues to service its debt. While we can hope that interest rates have peaked and will hopefully decline, the best way to ensure that our debt is sustainable is by decreasing it. The multi-trillion dollar question is how does our country do that?
As most of you who have read my columns in the Augusta Business Daily and previously in other venues know, I am a strong advocate for financial literacy. My advocacy has been focused on improving the financial literacy of children and young adults, starting in elementary school and continuing with programming through middle school, high school, post-secondary education, and even in the workplace. However, I think maybe we should also be promoting financial literacy for our politicians in Washington as they must have missed the lessons about budgeting; particularly controlling spending such that you only spend what you can afford. In lieu of providing such training for our politicians, I make the following two recommendations to get our financial house in order. Please note that neither of these recommendations is pain-free. However, taking our medicine now is better than the ramifications of what can happen later.
- Social Security Reform: For obvious reasons, politicians have always treated Social Security as the “third rail”– something not to be touched. They are afraid to turn off voters. Unfortunately, entitlement programs like Social Security, Medicare, and Medicaid comprise 45%-50% of our federal budget and Social Security will be insolvent by 2033, if they continue to do nothing. There are a number of proposals out there including raising the age required for the full benefit, which was last raised in 1983, and increasing the maximum amount of earnings subject to social security tax which is currently $160,200. Another creative plan is being developed by Senators Bill Cassidy (R-Louisiana) and Angus King (I-Maine) to increase social security revenues. The time to act is now and although none of these solutions is without pain or sacrifice, the price of doing nothing like a significant decrease in benefits in 2033 is much worse.
- Bring Back Simpson-Bowles: In 2010, President Barack Obama created a bi-partisan Presidential Commission on deficit reduction, co-chaired by former Republican Senator Alan Simpson and former Clinton adviser, Erskine Bowles. The commission ended up putting together a ten-year plan that would have reduced the debt by $3.9 trillion. The plan’s main provision included capping government spending at 21% of Gross Domestic Product (GDP), reducing mandatory government spending, particularly on health care, making Social Security sustainable (see above…increasing both age requirements and taxable earnings), increasing government tax revenues to 21% of GDP while lowering tax rates and various other reforms. Unfortunately, the Simpson-Bowles recommendations were never adopted since only 11 of the 18 commission members voted for it to go to Congress for a vote. A super-majority of 14 was required. President Obama also elected not to go forward with it. If the Simpson-Bowles plan had been adopted, the debt-to-GDP ratio would have dropped to 60% by this year and ultimately to 40% by 2035. That ratio currently stands at 98%.
Clearly, the Social Security reform and Simpson-Bowles plan that I’m recommending will involve painful choices for our politicians. However, the result would be more than worth it. Right now, we are on the road to economic turmoil that would be much worse than any medicine we take in the short term. It is time for our political parties to come together and address these issues in a bipartisan way as it cannot happen any other way. People throw around the term “existential crisis” often these days, but this truly is one if we do not get our financial house in order.