Recent economic news has me really depressed.
It looks like the deficit for this year will be around two trillion dollars. That's a lot of money. The current US deficit is around 11.5 trillion dollars, so its a 20% increase in just one year. That's $40K per capita, or about 75% of GDP. In absolute terms, we have the most debt, but in relative terms, we're now in the middle of the industrialized world as far as percentage of GDP goes.
Now, deficit spending is good in some cases. Just like for an individual, if borrowing money helps you develop the economy, its good. For example, an individual's student loads are justifiable, just like government investment in infastructure. Likewise, self-defense or moderating a recession can be legitimate expenditures. But we're running major deficits just to keep the store open.
There are only a few ways to deal with this that I can see. Now, I'm not an economist; I'm just a liberal arts major that took Econ 101 a few years ago. But, I know how to balance a checkbook.
1) Continue to run up deficits. This works so long as US dollars are the best option compared to other options (so, if, say, Euros and Yen are shittier than dollars, then dollars still look pretty good as a reserve currency). Problem: This may require us to pay higher interest rates though to creditors as our credit-rating slips due to massive debt.
2) Grow the economy. If you can make GDP increase, then debt as a % of GDP decreases. Its better to owe someone $20 and have $200, than to owe someone $0 and have $50. Problem: Hard to do, hard to predict, and there's the temptation to spend everything during boom cycles and save nothing.
3) Cut spending. Problem: This would be hard. If you eliminated the entire defense department overnight, it would not balance the budget. And its very unpopular to cut welfare programs, which is what you need to do to talk about big money.
4) Raise taxes. Problem: Not so popular, politically. Also, perhaps contrary with trying to grow the economy.
5) Print more money. Problem: inflation.
5b) Repudiate the debt. Problem: hyperinflation.
6) Pray and hope. Good luck with that. Its working great in California!
Complicating this bleak scenario is the prospect for social security's future. It looks like Social Security will need to start drawing on its trust fund in 2018ish. The trust fund is a bunch of money saved during years of surplus. Except, congress has already spent this money. The trust fund is full of IOUs. Hrm. That IOU thing is working out great for California, by the way. So, basically, social security will start to cash in loans that the feds have made. That may put a lot of pressure on the whole system with perhaps unpredictable consequences.
Even if spending all the IOUs works out ok, then social security still runs out of even those in 2041-2052. Hrm, that's when I'll be starting to think about retirement. See why I think of my 12% social security tax as a charitable donation?
I see us as having about 10 years to implement some solutions before that huge gaping social security hole is upon us. So, I'm concerned about the ongoing orgy of federal spending.
Sure, saving UAW jobs is good. Cost: $130 billion+
Obama's Healthcare plan: Projected $1.6 trillion over our critical 10 year window
War in Afghanistan & Iraq: Probably another trillion over the next 10 years
Obama's Global Warming Plan: Estimates vary, but perhaps $0.5-3 trillion over 10 years
I'm not even touching TARP as I don't think anyone really understands it. And this doesn't touch all the little programs and welfare projects and pork spending that eventually adds up ("A billion here, a billion there, eventually you're talking about real money").
Also bear in mind -- how many major projects, especially government projects, come in under budget?
The question is, what does this spending get us? Will it build infastructure that generates economic activity? Will it better educate our workforce and improve our human capital? Will it create jobs and grow the economy? Will it create sustainable growth that doesn't require permanent taxpayer life support to maintain?
Unlike California's meltdown, a federal debt crisis will hit everyone. States are addicted to federal money for schools, highways, welfare, and medical care. So are individual people (try cutting social security!). If the value of the dollar is unstable, or if we see hyperinflation or debt repudiation, then the entire national or global economy can come crashing down -- and we think this recession is bad!
I think in this vital 10 year window, we, as a nation, need to look carefully at the checkbook. We need to start thinking about implementing some real solutions. I don't know what the fix is. I think we need to try lots of things. We'll need to cut spending. We'll need to grow the economy. We need to simplify the tax code and reduce waste in tax collection. We may need to increase taxes or eliminate loopholes that don't create economic growth. We may need to accept some inflation, as long as its equal to other country's inflation so that our dollars aren't worthless.
If we don't then economic problems will become social problems. I think people will be upset if their social security checks get cut, or if their taxes double, if inflation hits 10%, or 20%, or 50%. I would like to see some real, serious, genuine discussions about how to manage our national debt in a transparent manner. We have a decade to make wise choices, but I'm afraid that we'll pork it away. I doubt either party will want to do a 180 and control their addiction to spending money.
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