Business Forum: Are we doomed to become Greece?
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I, for one, am tired of the politics of debt. It's a math problem, for heaven's sake.
I am concerned about the country's debt problems for professional and personal reasons. Professionally, I watch the economy so that I might better provide advice and management for clients' financial affairs. Personally, I am concerned about my children's and grandchildren's futures.
In household terms, if you have a $60,000 income and can afford a $75,000 mortgage, if your income goes to $120,000, you could reasonably afford a $150,000 mortgage. Your debt doubled, but so did your income. The nominal debt is irrelevant. What is relevant is the ratio of debt to income.
Now let's buy a bigger house with a $150,000 mortgage but only $5,000 more income. In the first example the ratio of debt to income was 1.25 or 125 percent. In the second it increases to 2.31 or 230 percent.
This household is now likely under severe financial stress. Any decrease in income and the situation becomes worse. This is exactly the math that caused the housing crisis. Too much debt versus income.
A tried and true principle states that if you continue to spend more than you make, you will fail. This is called bankruptcy. It happens regardless of political affiliation. Math is no respecter of party.
Bankruptcy causes your household and/or businesses pain. But it goes beyond you. It also hurts those to whom you owe money. The chain reaction is devastating. Among our problems is that too many people do not see the moral imperative to paying our debts. Let the bank or school or insurance company or government pay.
Let's apply the math to government. Gross public debt is projected to exceed $17.5 trillion by 2013. (That's over $56,000 per man, woman and child in this country of 311 million people!)
But we need to relate that number to the economy's "income" as expressed in Gross Domestic Product. Only once in the past century, during World War II, has the ratio been above 120 percent. The 120 percent mark will be exceeded soon if it hasn't already.
The good news? We have been here before and not only survived but thrived after WWII. Income increased because of post-war business growth.
But if the trend of debt exceeding income continues much longer, the math won't work and the United States could become another Greek tragedy. The math message is clear. Governments must enact policies and behaviors that get us back on track. And it needs to happen within the next few years.
Let's be at least honest about this. Dramatic and sustained increases in borrowing at best are inflationary and at worst create insolvency. We could be headed for both. We desperately need statesmen and stateswomen to put aside ideologies, pride and political gain and confront the math seriously and pragmatically. Government spending must be brought under control and reduced as a percentage of GDP.
A spending freeze would be a good start. I cannot think of a time in my life where the federal government and probably most state governments actually spent less in a year than they did in the prior year.
We are not doomed to become Greece. Our ratios are still manageable, and our private sector is still creative, entrepreneurial and robust.
Spending freezes and, preferably, actual cuts are essential. (Eliminating waste alone could create a large portion of the needed cuts.) But they must be accompanied by practical policies that promote economic growth. In other words, we cannot handicap the private sector with unnecessary regulations, bureaucracies and taxes. Businesses and taxpayers are asked to carry too much unnecessary baggage. It is time to lighten the load, not increase it.
A combination of spending control and business growth offers the only hope of getting out of this mess.
Hopefully we can avoid drastic austerity that would cause European-type pain. I suggest incremental but significant changes that will temporarily halt spending growth and allow a growing economy to catch up and actually create more revenues so that governments could move toward balanced budgets with less pain.
The consequences of continued irresponsibility are dire. If we want to avoid becoming Greece, we need to change our ways. If we do, the future is bright. If we don't -- well, to quote Forrest Gump, "Stupid is as stupid does."
First Published June 9, 2012 12:00 am