By Tom Kando
On Feb. 13, President Obama presented his 2013 budget plan to Congress, calling for $3.8 billion in expenditures. The plan projects an increase in the federal debt of $1.3 trillion in 2012, and another increase of nearly $1 trillion in 2013.
In 2011, the total fed debt was nearly $15 trillion, or just about 100% of US GDP (which is also about $15 trillion). Currently, 7% of the federal budget (about $250 billion) is spent to finance the debt.
America is in a bleak situation. But (or: in addition), consider this:
1. Our government’s debt-to-GDP ratio is only a bit above the world’s average, which is around 80%, and it is way below that of Japan, where it is 220%. Apparently, there IS life after debt.
On the other hand, the Japanese people own a much greater proportion of their government’s debt than do the Americans. We are much more indebted to foreign entities (E.g China).
And this brings me to my next central point:
2. Everyone has been clamoring about the federal debt for ever, especially the Republicans, who see this as an opportunity to dismantle the government.
But practically no one talks about the other deficit - the trade deficit: if you rank the world’s 192 countries by the size of their balances of trade, the US is dead last.
About 60 countries have a positive trade balance, and the rest are in the red. The largest positive balance is enjoyed by China (almost $300 billion annually), followed by Germany ($150 billion) and Japan ($130 billion). Tiny Holland is also doing very well, in 8th position (almost $50 billion).
And the US? We are the bottom of the list, at number #192, selling each year $600 billion less to other countries than we buy from them. In other words, each year, the American people are sinking deeper into debt to the tune of $600 billion. The second worst trade balance is Turkey’s, at #191, and then Italy’s at #190. But this is not an issue that interests anybody - not the politicians, not the public.
Isn’t the economic catastrophe which awaits America if it doesn’t change course, largely rooted in its inability to practice at least some measure of “Mercantilism”? (I.e. produce and sell things of value, and thus earn as much as it spends?)
The vicious cycle of indebtedness is the same whether it is the government, the American people, or a household which charges too much on its credit card: You fall further and further behind. You are unable to pay back the principal, and as you borrow more, your finance charges rise. Each year, you burn up more of your money just paying interest, and you have less money to buy things.
Already, 7% of the federal budget, a quarter of a trillion dollars, is wasted on paying interest. Even if the size of the deficit were to decline, as long as the government continues to borrow additionally, it will spend an ever larger part of its budget on finance charges, having less and less left for social security, medicare, the military and everything else. This is a death trap.
There is only one solution: taxes must be raised, quickly and significantly. The American economy will not grow out of its problem. And let’s stop the asinine debate whether or not the rich are contributing their fair share. They are NOT.
Furthermore, America must stop spending more than it earns. Of the two deficits - the federal deficit and the trade deficit - the latter is the scarier one.
Only 12 years ago, when Clinton was President, the federal government enjoyed a surplus! I can’t rehash all the causes of the current mess, but clearly the George W. Bush administration started us on this disastrous trajectory.leave comment here
6 comments:
Tom, Both the failure of the US to balance its budget and competitively produce goods and services is a serious problem. The first is a result of the control of government by interests that want to use the government to get something for themselves at the expense of others--one of the reasons Plato said democracies break down. The second is the related idea that corporations can be taxed, regulated, and sued to redistribute their wealth. The result is that American corporations move operations to other countries, giving us the trade deficit--and domestic income disparity.
The good news is that exports have grown rapidly under Obama; the real free trade president.
The good news is that exports have grown rapidly under Obama; the real free trade president.
I appreciate Gordon's and Scott's comments.
They represent two different responses. One more critical of government policy, the other seeing more benefit in it.
A couple of comments. First, Scott is simply mistaken - exports were highest in 2008 - when the world economy took a dump we dropped and we have recovered but not to the 2008 levels. So we have come back but to call this President the "free trade president" is a bit of a stretch.
Second, the rent seeking that Gordon describes is indeed a significant problem - people are trying to use the government to settle the uncertainties of the market - that has increased as the size of government has increased.
Third and most troubling - the deficits (counted in either the unified budget format or the more limited ones have grown significantly since 2000 when we had an apparent surplus (which simply ignored the inter fund transfers that we took from the Social Security trust fund to "balance" the budget. Bush grew the deficit (both in the current fund and in long term commitments like Medicare part D - but Obama took the profligacy of the Bush years and grew the problem significantly. At the beginning of this administration it was claimed that if we injected a trillion dollars of borrowed money into the economy that we could hold unemployment under 8% - that was simply nonsense - we ballooned the deficit and still suffer from almost 40% of federal spending coming from debt and no real results for all that supposed surplus.
I appreciate “Dr. Tax’s” detailed response. He is clearly knowledgeable. But there are several different possible perspectives on these issues:
For one thing, regarding “blame,” “Bush vs. Obama,” etc., one can be reminded that the Bush combination of tax cuts and unfunded wars was the first and major lunge toward permanent and enormous federal deficits.
Furthermore, Obama’s deficit spending has been the classic Keynesian response to economic recession - massive but temporary borrowing in the hope of reviving growth, and thus larger government tax receipts in the long run.
Whether Keynesianism works or not (for example, whether it got us out the Great Depression or not) has been debated for ever (I personally favor it, but what do I know?).
On the other hand we DO know that supply-sides, the Laffer Curve and trickle-down economics do NOT work (in terms of increasing government receipts).
Anyway, we do seem to agree that our indebtedness is going to be our undoing. What we probably do not agree on is the remedy.
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