The Elephant in the Room

Some problems are simply too big to ignore, aren’t they? Some political issues should be so important that they demand the attention of both parties, right? For almost a decade, however, one of the most impactful economic and fiscal issues of our time has simply been pushed aside by both parties. At best, it has been the elephant in the room that nobody wants to acknowledge, but everybody knows is there: As of last week, the United States government had a $1.75 trillion budget deficit. Simply put, as a nation we owe more than we have-substantially more. The debt is damaging the economy, increasing our risk abroad, and placing a great burden on future generations.

When a government has a deficit, it needs to raise money to pay for spending initiatives, and each step in the process has potentially devastating results. Our leaders need to take a hard look at the consequences, and consider how the damage is spreading:

Increased debt to foreign countries: In order to finance massive deficits and raise revenue for government spending, one of the most commonly used methods is to sell debt to foreign nations. There was a tremendous example of this last week, when Secretary of State Hillary Clinton visited China to encourage them to purchase more U.S. Treasury Bonds. The current national debt stands at $10.6 trillion, meaning we owe close to 75% of our current GDP to foreign nations. In response to Secretary Clinton’s visit, the Chinese government, which already holds approximately $700 billion in U.S. bonds, will likely ramp up its holdings to close to $1 trillion. This should be worrisome. When any foreign nation holds that much debt, it increases its economic and fiscal leverage, especially when so deeply entrenched in treasury bonds. This gives a nation like China tremendous leverage in out financial system, as a massive sell-off of government debt would lead to hyper-inflation, massive revenue loss, and wide-spread instability in the market. This financial weapon may be the most potent in future questions of national security. Think of it this way: Would you want to be personally indebted to one billion strangers?

Higher taxes:The other option to finance a deficit, recently championed by the Obama Administration, is to raise taxes. Raising taxes temporarily brings more revenue back to the government to pay down debt and finance spending projects. The problem here, however, is that a higher tax rate pulls money out of the economy and into the government. This quickly suffocates investment and consumption, key factors of economic prosperity. In other words, the more money the government charges businesses and consumers to invest, the less they will invest. The more money the government takes from consumers’ earned income, the less those consumers will spend. When you cut investment and consumption, the economy stalls.

Inflation: The final option to finance government spending is for the government to print money. This has been happening for years, most notably with the recent TARP and bailout programs, where the government needed to generate cash to pay for its spending commitments. Since we are have a deficit, that cash is simply not there, so the government uses its ability to print money to provide necessary funds. However, when a government prints money, especially over the long term, inflation results. The more money circulating in the economy, the less each dollar is worth-this is a classic case of monetary supply and demand. Essentially, this means that each dollar you now have will be worth less in the future, unless your investments pace properly with the rate of inflation. But if you combine inflation with low investment and consumption, you have an economy in downturn with inflation rising rapidly. This, of course, is how economies fall into depression.

Who’s responsible? Both parties are to blame, as are their leaders. When President Bush took office in 2001, he inherited a $128 budget surplus, one of the shining achievements of the Clinton Administration. At the end of the federal budget year for 2008, the Congressional Budget Office reported a deficit of $438 billion-the fastest eight year deficit growth in the history of the country. The Bush Administration was hurt by the post 9/11 recession, which greatly impacted tax revenues, as well as massive spending on the Iraq War, but a huge portion of the deficit came from costly congressional spending. Expensive programs like No Child Left Behind and Medicare drug supplementation, combined with President Bush’s reluctance to veto earmarks and pork-laden bills, created an environment of spending far from fiscal conservatism. Now, after inheriting an already massive deficit, President Obama recently pushed through a $787 billion spending stimulus and $3 trillion budget. Combined with the various bailouts and the TARP program, analysts expect the deficit to double by 2010.

The solution to the deficit problem is simple: practice fiscal responsibility. This means reigning in spending, aggressively eliminating earmarks and pork, and shrinking government bureaucracy. One of the great faults of the Bush Administration was its branding as ‘conservative,’ while it continued to widen the deficit and spend at unprecedented rates. We have gone nearly a decade without fiscal responsibility, and past Administrations, from Reagan to Clinton, proved that economic prosperity comes with fiscal conservatism. Our current exposure will only lead to greater economic deceleration, increased leverage from foreign nations, and market instability. We can no longer ignore the elephant in the room.

-Matt Benchener from TruPolitics.net