Debt and Deficit - A Misguided Debate

Being that it has been a very long time since my last post, I felt it appropriate to pick a fight.  This time I am calling out both Democrats and Republicans for their apparent lack of even a modest amount of economic training.  Unfortunately, members of both parties have little time, due to their full-time job of fund raising, in addition to their part-time job of fighting with the other side, to fully verse themselves on economic realities.  Therefore, we see congressmen and congresswomen on the campaign trail pulling out sound-bites, statistics, and headlines that fit into their political party platform.  Often this is to disastrous effects.  See, the benefit of being an independent is that you have the ability to call out both parties without feeling like you are compromising any underlying loyalties.  I try very hard not to get political, but at times, I suppose, its necessary.

The debt problem is bad, and the budget deficit needs to be addressed, but the proper way to handle both of these problems is within a framework of established economic relationships.  The United States of America is not Greece, (who by the way has spent half of the last 200 years in some sort of default or restructuring), and is not subject to the same market forces as Greece.  We are also not Japan, a country with over twice the debt load we have and a falling population.  Parallels to either of these countries fail to hold any relevance.  Therefore, I will start with the answer... Focus on economic growth first and foremost, through getting people back to work, even if this comes with a cost, and address debt and deficit in terms of medium and long-term commitments.  The question:  What is the proper way to handle the current budget and debt crisis in the United States?  What follows is a brief explanation.

The budget deficit is the annual amount of money that the US spends in excess of the revenues it brings in.  For 2010 this amount was $1.4 Trillion and represented 8.5% of GDP.  The debt ceiling is the legal limit imposed by congress that the US is capable of borrowing in terms of their total debt.  This is very much like the credit limit on your Visa card.  We are about to run into this limit now at $14.29 Trillion which at current times equals 98.6% of GDP.  This is roughly equivalent to having a debt load equal to your annual income (like making $100k and also owing $100k on a mortgage).  As logic would have it, the debt level goes up every year by the amount of the deficit, which over time is not sustainable.  Analysts vary widely in their forecast for the amount of debt the United States can carry without getting in trouble with the rating agencies, and thus, more importantly with our creditors.

The democrats maintain that this burden should be helped paid off by ending what are popularly known as the Bush-era tax cuts for people making over $250 thousand, taking their marginal tax rates from around 35% up to around 39%.  Republicans believe that spending needs to be brought under control and that way too much money is being spent on social entitlements such as social security and medicare.  While neither side is out of line in their approaches, what makes the current arguments so frustrating is the single mindedness with which they champion their causes at the expense of simple compromise and logical thinking. 

As I have mentioned before, this country's biggest problem right now is the 12 million people who are unemployed.  Furthermore, the effects of this latest recession are still being felt by many at the bottom rungs of the economic ladder.  Hiking taxes and slashing benefits for the economically disadvantaged is not the answer right now. This country needs a comprehensive job bill which will get Americans working again, even if this causes further stress on the debt load.  I strongly believe that social security needs to be refigured, and I also can believe that millionaires and billionaires (as President Obama puts it) can afford contribute an additional 3% of money they make over $500, or whatever the latest iteration of the democratic proposal is.  But neither one of these measures will mean a thing if it clogs up the economic engine.

The current passionate debate on these issues is at least heartening in the sense that we are having the debate.  Their is finally a political will to get something accomplished on these very hard issues.  But the lack of compromise at the expense of economic growth and possible debt-ceiling-imposed-default is inexcusable.  Business owners need one thing right now and that is certainty.  With so many major issues up in the air with no clear sign of what the future will hold, business owner cannot properly plan for the future.  Normally, the less congress does, the better for the country.  In this case, action is required, and all we are getting is angry ideologues misquoting dead economists.

Here is what needs to be done, and what I am still hopeful will eventual get squeezed out of congress.  Pass the debt ceiling increase which includes some token amount of spending cuts.  Pass a comprehensive jobs bill, including the idea from the administration of creating an infrastructure bank, which will start putting people back to work.  Then, and only then, can their be some serious work done on fixing the tax code, and reworking the entitlement programs.

Bottom-line for those worried about your investments is that the United States will not go bankrupt.  STOP buying gold from guys on radio commercials.  Stop listening to these over-dramatic doomsayers who throw out huge figures forecasted way out into the future, like "by the year 2030 the United States will owe China $50 Trillion dollars".  Its all ludicrous.  The US dollar will remain the worlds reserve currency because there is no alternative and we are still the safest investment on the planet.  The debt market would not be lending the United States money at less than 3% over ten years if there was serious concern about its solvency.  This country has only defaulted twice, each time only technically so, (meaning our debts were not unpaid, only that the terms were altered due to ulterior motives... this was the civil war, and going off the gold standard.) and it is still the destination of millions of immigrants who risk life and limb just to BE here.

Our only risk right now is that the recession will get drawn out due to congresses inaction based on political ideology instead of logical economic principal.  This is still the greatest country in the world, its just time that congress started acting like it.