Parting the Red Sea

I expect to see a large part of the upcoming presidential campaign paying lip service to our nation’s worrisome budget deficit and how it should be tackled.  The Congressional Budget Office (CBO) estimates our current shortfall at a staggering $1.1 trillion for 2012.  While enormous, most of the outstanding balance for which America is on the hook doesn’t get captured in this figure if the debate stays at this level.

The budget deficit is just the difference between what our government collects and what it spends.  If you were to do the same thing you would look at what funds get deposited into your checking account throughout the year and subtract out the bills as they get paid.  But let’s assume you have a mortgage with an outstanding balance of $200,000 that will be paid off in 25 years. The full amount is owed, but how should you account today for the balance due in future years?

The U.S. faces a similar circumstance.  We have promises outstanding for future Social Security and Medicare payments.  We have trillions coming due in the future represented by bonds sold to borrow money.  Proceeds from these sales are used to pay off current bills, but the bonds really represent additional bills needing to be paid in the future, along with the interest they accrue.  When all of these future obligations are considered together we arrive at something called the fiscal deficit.

The CBO recently forecast our long-term fiscal deficit, they call it the Alternative Fiscal Scenario, at $222 trillion!  It grew by an astonishing $11 trillion just in the past year and there is no sign either party has a credible way to bring it under control.

Our nation is drowning in a sea of red ink.  How can we stop it?  How would you stop it if you found your family was deep in debt?  Cut spending?  Pay off your credit cards?  Maybe see if you could get a raise?  All those things make sense on an individual level but how do they apply at the federal level?  Austerity.  Benefit cuts.  Higher taxes.  Regardless of current campaign rhetoric, if our children are to have any hope reaching the land promised by our shared American dream, these aren’t just options.  They must all become part of our immediate future.