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Clear Thoughts
Just How Bad is the Federal Deficit?
Originally Published Thursday, February 17, 2005
| Our nation?s federal deficit is huge and the way to reduce it is a very complex problem with no simple solution. What is Clear?s stance on this issue? |
News about Social Security has certainly been hogging the headlines lately. But believe it or not Social Security is both self-funded and over-funded for the present. President Bush is rightfully addressing it as an important future issue that may blow up in years to come if not addressed soon.
So let's talk about this year. In 2005 if the President and Congress stopped funding everything except defense, homeland security and programs such as Medicare and Medicaid, the budget deficit would still be near $75 billion.
If we called on our elected officials to eliminate every school lunch, public health, faith-based, housing assistance, space exploration, medical research, arts, environmental protection, highway, farm subsidy, national park and veterans program we would still have a deficit of about $75 billion in 2005.
Simply put, domestic programs only make up about 20 percent of the federal budget. President Bush proposes spending about $352 billion for those domestic programs this year.
If one were to think of the government like a company, he would realize that the only way to reduce the deficit is to lower spending or increase revenue. The problem is that revenue, which comes from taxes, is far outweighed by spending, which is dominated by things like national security. The budget shortfall over the next decade is projected to run into the trillions. Add in additional funds for war and the numbers not only become staggering, but also just plain unpredictable.
Something has to give.
No one seems to have the "silver bullet cure" that everyone seeks, and there probably isn't one. The entire country basically wants the same thing: perfect security, lower taxes and better services. Sadly, this is not realistic.
In the end, a combination of higher taxes and reduced services are probably the only answer based on opinions we are reading from the political right and left, the President and Wall Street. This seems not to be a palatable solution. Honestly, what could be worse?
Well, as investors, a shock to our economy would be far worse. Any drastic move that government mandates having dramatic ramifications on the country will move the markets. The concept of gradual improvement, with bullet-biting to move the needle back toward solvency each year is the best solution. It takes time for the markets and our country to get used to new ideas and new situations.
At Clear Asset Management we believe that gradualism is the right philosophy for correcting our budgetary ills. We feel that long-term strategic decision-making that includes a phased plan of action is required to maintain this country's bright economic prospects and enhance our standard of living in the long run.
As money managers, we closely watch each bill and law. We observe how they enhance or hurt business sectors, companies and markets with an eye on continually providing benchmark beating returns for our investors.
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