A lot of people compare the US Government‚Äôs debt crisis to a dead-beat who can‚Äôt pay his bills and continues to borrow more and more instead of rolling up their sleeves and getting to work. The Government is a lot more complicated than that and so we investigate why we are still running a deficit.
The US Government is often compared to a US consumer that has gone shopping on credit cards and now is trying to find a way to explain to their spouse (the public) that the only reason they bought those shoes, purses and military tanks is because they made them feel beautiful and you never pay enough attention to them anyway (pause for long breath). But that‚Äôs not a very accurate description of how we got so far into debt and why we can‚Äôt actually balance the budget. Nor does it explain how we owe China so much money. How did we end up owing China?
The Government is in debt because it borrowed its citizens
The story starts with the money supply. Basically, when the Government wants to encourage savings and reduce the overall supply of money in the economy it offers bonds (Gov‚Äôt Bonds) that act as a safe haven for investors looking to earn moderate interest while maintaining a high level of security in their investments. By buying these bonds from the Government investors put money back into the government, which affectively creates a larger incentive for investors to save, invest their money and reduce spending. In doing so, however, the Government now takes on debt - it affectively owes it‚Äôs own people in the amount of the bonds plus the interest on those bonds. As you can see, society isn‚Äôt worse off in this exchange, and the Government doesn‚Äôt have a spending problem. Of course, this is only one of many factors contributing to the deficit.
The Government is in debt because of we expect too much
Here‚Äôs the thing about running for election. No one wants to hear you‚Äôre going to cut a bunch of valuable programs and offer nothing in return. No one. And it doesn‚Äôt matter if that‚Äôs the sensible course of action, the public actually demands more services with greater fervency every election. This leads politicians with very little options other than to promise bigger tax breaks, increased spending and more services, while still having their so called ‚Äúhidden agenda‚Äù of trying to slash every program they can get away with in order to attempt to balance the budget. It‚Äôs an unfortunate consequence but it starts with expectation management on the part of the public. You can demand better health care coverage, or you can demand lower taxes or you can demand the Gov‚Äôt not owe $10 trillion dollars. Pick 1, and only 1.
The Government is in debt because of protectionism
Protectionism is the economic policy of restricting trade between countries in order to improve the through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow (according to proponents) "fair competition" between imports and goods and services produced domestically. This ends up hurting the economy more than helping it because it reduces urgency for fierce global competition. The ‚Äúbuy American‚Äù attitude may be fine in the short term, but in the end American manufacturers stop trying to produce competitive goods because they no longer have to, and we end up with products that are less quality than they could be. More importantly, this creates a burden on the Government to bailout these companies as now too many jobs are dependent on them.
Resolving the debt is a difficult issue to address. Obviously social programs will need to eventually be cut while taxes will need to rise. Protectionism will need to give way to a free and open global market (which will cost a lot of jobs in the short term), but this is the only solution for a long term viable country that remains fiercely competitive and yet maintains the high quality of life we are all accustomed to.
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