Well, folks, unless you’ve been living under a rock since Cyber Monday, you know that the politicians in Washington have not gotten very far in terms of solving the “fiscal cliff” before the end of 2012. When you read this, we’ll have 10 business days left before we ring in the New Year. The crux of the dispute seems to be raising revenue – code for “higher taxes” – versus cutting spending.
While it’s easy to get all wrapped up in how big government has become in this country – be it as an employer, as a producer of a rising percentage of the gross national product, or other metrics – I find it best to reduce these matters to something that everyone can relate to: According to U.S.DebtClock.org, public debt in this country is roughly $16.3 trillion, which equates to $142,511 per taxpayer and $51,985 per citizen.
We realize that not every citizen is a taxpayer, but to make sure we are on the same page, there are roughly 115 million people who pay income taxes compared to the overall U.S. population that is approaching 315 million. That means just about one out of every three people pays taxes. With more people dropping out of the labor force each month, we have to wonder how we’ll be able to continue to pay for that debt.
But, to really put this revenue and spending in terms that most people can understand, let’s look at credit-card debt. There are roughly 610 million credit cards held by U.S. consumers, according to the Federal Reserve Bank of Boston. On those millions and millions of credit cards, the average credit card debt per consumer is roughly $16,000.
Now in the abstract, $16,000 may sound like a lot of money to some folks and not so much to others, so let’s add some more context. According to the Census Bureau’s “Income, Poverty and Health Insurance Coverage in the United States” report – issued in September – median household income in 2011 was $50,054. That was down 1.5 percent from 2011, more than 8 percent lower than in 2007 and 8.9 percent lower than the median household income peak that occurred in 1999.
Clearly, part of that income pressure is due to significantly higher levels of unemployment now than in 2007 and 1999, but let’s get back to income and spending. According to the data, the average credit card debt per U.S. consumer equates to 32 percent of the median household income. Now that’s a big number. In order to pay down that debt and free up disposable income, there are only so many options. The consumer can look to refinance that debt at a lower interest rate, but that will only go so far.
The two other options are to earn more or to cut spending in order to pay down more of the credit card debt. Year-to-date job creation has averaged close to 150,000 jobs per month and, without a sharp increase, that pace means there will be many unemployed for some time to come (hence the Fed’s new stimulative policy announced Wednesday). In other words, while some might be able to secure additional work, the prospects for significant income improvement for the average American near-term are pretty modest. That means looking within the household budget for expenses that can be trimmed; being selective on what, where and how money is spent, and, generally speaking, cutting back spending where possible.
When we look at the issue of the fiscal cliff through that lens, it becomes rather clear that government spending needs to be reformed and not simply have its growth rate slowed. Remember, it was the nonpartisan Congressional Budget Office that said President Obama’s 2012 budget will cause large and persistent yearly deficits that will push the public debt to $20.8 trillion by 2021.
Is cutting back spending easy? No. Does anyone really want to do it? No. But as we know from our own personal balance sheets, there are times when it’s necessary, and cutting back on reckless or unnecessary spending tends to be a good starting point.
• Chris Versace is the editor of the PowerTrend Profits newsletter and ETF PowerTrader. Visit them at ChrisVersace.com or follow him on twitter @_ChrisVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.