My Candidate to replace Tim Geithner
Treasury Secretary Timothy Geithner is under pressure
to resign and might not survive. My candidate to replace him as the new
Secretary of the Treasury is Dave Ramsey of Financial
Peace University. Ramsey has helped a million evangelicals
perform a personal “Total Money Makeover” so I’m hoping he can do the same for
our government.
Since Ramsey pulls in millions telling people what
our grandmother already told us but we ignored maybe he can apply his financial
principles to government next. Here’s how it might work:
Dave Ramsey’s “Total Money Makeover” for the USA
0. Tithe—give 10% of your
income to God.
Dave Ramsey encourages
tithing though it does not appear in his “Baby steps” plan until the final
item—after you get rich. But he says in his writing that the Bible mentions “first
fruits” more than 20 times so he affirms it as step zero even though it isn’t
in his list. When Dave Ramsey becomes
Treasury Secretary maybe he will get the nation to tithe. If he does apply the
tithing principle to the nation how would he do it—give 10% to the Pope?
Probably not. Maybe he’ll consider “foreign aid” the nation’s tithe? But I
doubt he would consider the fighter jets and war supplies we now “give” as “aid”
as a real tithe. I bet he’d want the money given to drilling wells for clean
water or fighting disease like Bill Gates does. But 10%?
That would be a huge increase. Today’s total foreign aid budget is a mere 20
billion—just 1% of the US government’s expenses, falling short of the 10% that
tithe should be. If he wanted the nation to tithe he’d have to increase foreign
aid by ten times—to 200 billion. It is as hard for a nation to tithe as it is
for individuals. On the other hand, maybe he’ll say giving is for individuals
not nations so let’s ignore the potential ten times increase in the nation’s
giving and not count this at all.
1. Build up an emergency
fund… $1000 at first.
The first step in Ramsey’s
plan is to save up an emergency fund—even before getting out of debt. For the nation that might mean building up a small reserve too.
To do that Dave will probably cut expenses so I suggest he cut Social Security
and Medicare by 10% next year—that would get the nation a small emergency
reserve. This first baby step is the easiest—except he’ll have to listen to the
AARP whine about the one-year cut, but ol’ Dave can
take it—he knows that emergency reserve will give the nation a cushion if it
wants to go to war somewhere without paying for it by raising taxes—we can use that
reserve.
2. Get out of debt…pay
down all your installment debt to zero.
The nation’s installment
debt is the national debt—it is all installment debt. Dave can’t start
solving this one until 2012 since he will be building up our emergency reserve
first—and if we stay in Afghanistan we will have spent a lot of that reserve
already… but let’s say he could start debt paydown in 2012 anyway. The US is
about 12
trillion in debt—about a half a million dollars per household according to
USA Today. That figure includes about 4 trillion the government owes to Social
Security—money the government “borrowed from itself” so they didn’t have to
raise taxes for military adventures and new programs. So Ramsey will lead us in
paying off 12 trillion in debt. And he can start in 2012… maybe paying the
whole thing off over twelve years. Total tax revenue is now about 1.7 Trillion a year so Dave will
need another trillion dollars a year in taxes to pay down the debt in a
dozen years (I’m ignoring interest here). To do that Ramsey will have to add a
surtax of about 70% on everything the government now collects to get enough
cash to pay down the debt in 12 years. Nobody likes a surtax but Ramsey says,
“It
is human nature to want it and want it now; it is also a sign of immaturity.
Being willing to delay pleasure for a greater result is a sign of maturity.” If we’re going to get
out of debt we’ll have to deny ourselves some things for a decade or so. That’s
the attitude I hope Ramsey will teach the nation. Maybe he’ll teach us to live
on less now so we can leave a debt-free nation for our kids. So,
what about the 300 Billion in annual interest I ignored above? I think Ramsey
will have to make cuts in spending to get the other 300 billion—he could cut
all Social Security payments, Medicare, Medicaid, farm subsidies,
defense/military spending and all other government budgets by about one-third starting
in 2012—that would cover the 300 billion. But the good news is this: as the
debt goes down, the interest will also go down so we can add back “raises” in
these program until (in 12 years) they might be back again about where they are
today—including Social Security and Medicare payments. Ramsey’s principles are
tough medicine for individuals—they’ll be tough for government too. It means
about a decade of reducing all government payouts by about a third plus
increasing all taxes with a surcharge of about 70% for a dozen years. But I’m
hoping he will convince the nation this medicine will pay off in the long run.
If he starts this in 2012 we could be debt free as a nation by 2024.
3. Accumulate 3-6 months
living expenses in savings
Wouldn’t it be nice if the
country became debt-free in 2024 and also had a half year’s income squirreled
away for big emergencies like a big war or a major recession? Then we wouldn’t
have to borrow money for these plights. Six month’s expenses
for the government is “only” about 800 billion dollars. How will Dave
Ramsey get this money? I bet he’ll
extend the 12-year surtax just six months more. Then by summer of 2024 we’d be
debt-free and have 800 billion stashed away for emergencies. Sure, he might
have to extend that longer if we stay in Afghanistan longer than a year or so
but it would be a start—we can’t keep borrowing money to pay for stuff—Ramsey
would say we ought to “pay as you go.”
4. Fully fund retirement
accounts… put 15% of income away for retirement
This advice is for
individuals and since our government never plans to retire it doesn’t need to
save for its own retirement. However the government does run a huge Social
Security-Medicare retirement program for citizens. I think Dave Ramsey will use
his retirement advice to insist that all the Social Security and Medicare
income be put in a “lockbox” so it can’t be spent for wars or automotive bailouts
or farm subsidies. This would mean at least another 10% cuts in other services
beyond the 30% above—bringing the total cut to about 40% in military spending,
farm aid, veteran’s benefits and everything else just to get us back on track.
Everyone will have to live on less but we’ll have a secure Social Security
system at least.
5. Take care of college
funding.
Ramsey tells individuals to
fully fund Educational Savings Accounts and/or utilize 529 plans. Education is
important to Dave Ramsey because he knows people without a college education
earn much less the rest of their life. I wonder if he’ll want the government to
also save for the next generation’s education.
Maybe he’ll establish a college fund like Social Security and put it in
a “lockbox” so it can’t be touched. Maybe everyone will be taxed to support
this fund since we are all supposedly obligated to “educate the next
generation.” Or maybe he’ll be more individualistic in his approach and enact
his college-savings plan by taxing families-per-child from their birth through
the next 18 years to fund the individually-designated college lockbox. On the
other hand, Dave Ramsey might not want the government helping parents at all so
he might end college all student loans completely and say it is the family’s
job to pay for their own kids’ college without help and without the
enticement of government loans. I bet he’ll take this route though he may still
have to design at least something for smart kids who are poor—most Americans
think smart kids who are poor should at least get a chance to go to college.
6. Pay off your home
early.
The government’s “mortgage”
on the National Parks and all government buildings and public lands is already
folded into its national debt, so Ramsey will have already “paid off the
mortgage” by the plan above so this will already be accomplished by 2024.
7. Build wealth
After people are out of debt
Ramsey encourages them to invest. So, in 2024 Dave Ramsey can really get to
work with the USA’s money. By then we will all have gotten accustomed to paying
a 70% surcharge in taxes while getting 40% less for it. With a reduced military
maybe we can let China and India serve as the policemen of the world. By 2024
we can eliminate the 70% debt-pay down surcharge. And since we will no longer
owe any interest at all we can reduce taxes even another 8%--(what we pay now
for interest on the debt). Maybe by then
we’ll be used to getting 40% less services so our kids won’t have to pay as
much taxes as we do. If you have a ten year old son or daughter today, in 2024
he or she might be graduating from college. Just think how his or her world
will be different from ours if we “bite the Ramsey bullet” and deny ourselves
today for the sake of tomorrow? All we have to do is put up with a 70% increase
in taxes for a dozen years and a 40% reduction in government spending for many
of those years and your kids can that start fresh!
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Of course many “real
economists” will say all this is amateurish and simplistic. They’ll say that such self-denial will end our
consumption cycle and plunge the country into a deep depression and we’d lose
millions of jobs as prices plummet. They’ll say that increasing taxes to pay
down the debt will strangle the economy and make things even worse. They’ll say
that if we paid down our debt, those who already have money will only be richer
while the majority who are deeply in debt will all go bankrupt sending the
economy plummeting. They probably argue that paying down the debt will bring
deflation too. Maybe they’re right, but I’d like to see old Dave Ramsey give it
a try!
Dave’s big challenge
would be to convince Americans who
are accustomed to profligacy to change their lifestyles and live on less ceasing
to send the bill to the next generation. Would Americans be willing to take a
30% cut in all Social Security, Medicare, Veteran’s benefits, college loans,
and the military? Would we put up with these cuts while paying an additional
70% tax surcharge for a dozen years to pay down our debt? Would Americans be
willing to quit sending so many million-dollar-a-year soldiers to Iraq or
Afghanistan or wherever the next crisis occurs without paying for it when we do
it? Would Americans be willing to forgo their own government benefits or
do we all imagine there are enough cuts in other people’s services to do this?
That’s the big hitch—but Dave Ramsey is a convincing man. Maybe he could do
it! What’s the alternative?
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One alternative is the
“lottery solution.” Maybe “it will all work out” because something
new will happen we haven’t dreamed of yet. Perhaps there’ll be some new
invention or new discovery that changes everything and makes all our debt
disappear. Maybe we’ll find a way to run cars on CO2. Perhaps world peace will
break out and we won’t need armies any more. Maybe everyone over 60 will die
off from a plague solving the Social Security crisis in a few weeks. Maybe the
Lord will return and the Millennium will begin. These are “lottery solutions” and
if they actually happen those worried about the
national debt now will seem like silly Chicken Little.
Then there is the
bankruptcy solution. When
individuals get this cornered they sometimes declare bankruptcy and start
fresh—sticking their creditors with their loan. That’s harder for governments
to do, but they sometimes do it. Indiana sort of did it once. The state
borrowed bezillions to construct canals all over the state believing canals
were the wave of the future. The state couldn’t pay it back and simply
defaulted on their loans and stuck the (mostly foreign) creditors with the
money. I suppose the USA could just issue “new dollars” and declare the old
ones worthless leaving anyone with dollars in the lurch (especially China).
When Russia bit the dust this happened. My friend Steve Horst tells of Russian
friends who had saved all their lives enough money to finally buy a used car. When the economy crashed and the
banks reopened that life savings was only enough to buy a suitcase. When Steve was there (1995-96) the same “life
savings” could only buy a Snickers bar. Starting over is one solution but this
would be even harder medicine than Dave Ramsey’s medicine for anyone who had any
savings. This would be a huge national ALT+CTRL+DEL that would give everyone a
fresh start—sort of like a Year of Jubilee. But boy oh boy it would be fast
pain.
The third alternative is most
popular in the past—print more money. This is the slow-pain method. The more dollars we print the less each
dollar is worth. This means that those who have a lot of debt (including the
government) get to pay back their debt later with “cheaper dollars.” But the
hitch is those who already have a stash of money (those who personally follow
Dave Ramsey’s advice… and the whole nation of China), these dollars they
have saved are worth much less each year—maybe as low as 25 cents on the dollar
by 2024. Printing more money is a quiet way to escape the problem. It provides
relief to those who owe dollars but punishes those who have them. And
eventually it is inflationary. But, we are a country where our citizens owe
more than 11 Trillion in personal debt… these debtors might actually welcome
the opportunity to pay off their debts with cheap dollars?
Of course I’m kidding… I
bet that Dave Ramsey won’t replace Timothy Geithner and whoever does, we won’t have cuts in
programs or military or any other spending and we won’t have a surtax to
pay down the debt, and we won’t pay for the troops headed to
Afghanistan, and we won’t pay for a new health care program or for any
other old or new thing we want but are not willing to pay for. I suspect the
nation will just print more money as long as somebody will take it off our
hands.
So if the printing-money
solution prevails, where does it get us? It gets us a much lower lifestyle for our kids and grandkids—and churches
too. Average family income has actually dropped in the last decade by a
couple thousand dollars in real dollars. More drops are coming—either in
real dollars or through inflation. By 2024 your 22 year old daughter or son
might earn $40,000 in their first job out of college. But at 25 cents on the
dollar they could actually only be earning $10,000 in today’s value.
(Just think how much worse it will be for the high school grad working at Taco
Bell!) In 2024 only a few individuals will be able to “support a family” on one
salary. Everyone in the family will have to work full time even to live lower
than their parents did. Teens may have to get jobs at the mall to help their
family out—not just to buy cool clothes at GAP. Just like individuals, sooner
or later governments also eventually have to “pay the piper” for a lavish
debt-supported lifestyle—and governments have no income but what they can get from
taxing their people.
I don’t prefer this
print-money future—but I suspect it
will happen. Dave Ramsey will go on giving his talks to stadiums jammed with
people trying to get control of their own financial lives while they hope they
will be exempt from the nation’s profligacy. But Dave Ramsey’s talks will have
to increasingly add one new feature in the future: He’ll need to teach his
frugal followers how they can protect the dollars they are saving from eroding
into quarters by 2024.
So, what do you
think? Does the national debt
matter? Do you plan to load up on as much debt as you can so you can pay it
back with cheap dollars in the future? Or, if you are a saver how do you
plan to protect your savings?
So what
do you think?
During
the first few weeks, click here to comment or read comments
Keith Drury
December 8, 2009
“I don’t want to walk across hot coals because it is fun,
but if I can be shown how a short, painful walk will do away with the lifetime
of worry, frustration, stress, and fear that being constantly broke brings me,
then bring on the hot coals.”
— Dave
Ramsey, Total Money Makeover