As of December 3rd 2012, the total public debt in the US breached the $16 trillion mark, and stood at almost 90 % of the country’s GDP. The Federal Government’s auditor, the Government Accountability Office (GAO) has called America’s current fiscal policy unsustainable. If the nation continues to be governed by the fiscal and economic policies that are in force now, devastating effects on the country’s economy will soon become apparent.
It is clear that unless effective steps are taken now, the American economy is headed towards an imminent disaster. For a country that is still deemed as the symbol of prosperity, the journey to its current state of affairs has been many years in the making. Many reasons have contributed to the massive American debt burden.
1. Historic Reasons
2. Continuation of Bad Economic Policies
3. Increased Government Spending
4. Government Bailouts to Wall Street
5. War Expenses
6. Entitlement Scheme Policies
7. Tax Reforms
8. Subprime Mortgage Crisis
9. Large Trade Deficit
10. Lack of Structured Plan for Debt Reduction
The economic / business cycles: Business cycles are an integral part of a country’s economic life. Every recession brings with it an increase in unemployment levels and a resultant reduction in the revenue from taxes. When this happens, the government has less funds to manage its expenses and resorts to borrowing from outside sources. The recession in 2001 and the current downtrend have both contributed their share to the huge debts accumulated by the US.
President Bush & Obama follies: Many of the fiscal policies adopted by President Bush have come under fire for contributing hugely to the current debt ridden state of America’s economy. It’ll suffice to say that under the Bush regime, the public debt in the US soared from $5.6 trillion to $10.7 trillion by the end of December 2008. These statistics have continued to sore under Obama’s presidency.
2. Continuation of Bad Economic Policies
Although critics have been vociferous about their unfavorable views on President Bush’s policies, the current President has chosen to extend many of these. Instead of curbing the damage wrought by these ill thought out measures, extending their validity has served to undermine the economy further.
3. Increased Government Spending
President Obama’s belief that increased spending by the government will help propel America out of the recession is dangerously flawed. Increased spending also heralds increased borrowing to meet funding requirements. Borrowings come with their own interest repayment requirements, which further add to the total debt of the nation. Contrary to the President’s expectations, government spending will only serve to push America deeper into debt.
4. Government Bailouts to Wall Street
In a bid to keep corporate America from tanking during the recent recession, the Obama government stepped in with bail outs to big financial mammoths like the Citi Group. The helping hand may have averted a disaster in these companies and also perhaps held up Wall Street through the worst of the crisis, but it is not clear whether it was a good move and in the larger interests of the nation. Whether this massive expenditure can ever be justified in the long run by significant contributions from these large companies to the overall economy remains to seen.
The continuing war on Iraq has already proven tremendously costly to the US in terms of men, material and money. Critics have been raising voices against the ‘unnecessary war’ for years now without much changing with the situation. As the war ‘after-efforts’ continue without end in sight, it is clear that no matter what the final outcome, for the US, it has been a ‘no win’ exercise.
6. Entitlement Scheme Policies
The number of retirees in the US is growing steadily. The payouts from entitlement schemes like Medicare, Medicaid and Social Security are also ballooning in proportion with this increase. This has resulted in huge pressure on the government’s coffers to sustain these payouts. As more and more employees cross the retirement age, the looming explosion in entitlement payouts poses an enormous threat to the financial sustainability of the country.
President Obama has admitted that any number of health care reforms will not do the trick unless changes are made at the grass root levels. Even if the right amends are put in place now, the positive effects will begin to be evident only after a minimum of 5 years. By then the debt situation may have well spiraled out of control.
The President’s tax cuts for low income groups is another legacy of the Bush Administration. While the concept of reducing taxes during recession is a tried and tested shoring up policy, the increased taxes for higher income families has largely dampened the effect.
Families with two earning members are elevated into the status of high income, high tax groups. The increased taxes dramatically affect the actual income received from two pay checks. This may result in one earning member opting to stay at home while the other earns. Result – lowered overall productivity, as more and more capable workers drop out of the workforce.
The subprime mortgage crisis has caused a large dent in the asset building and saving abilities of the American public. With confidence remaining low and the recovery in housing yet to come about, many Americans are choosing to retain a cautious approach to savings and investment.
With less investments, companies and the government alike are hard pressed to raise funds from the public for necessary expenses. This shortage is translated into subdued industrial activity which affects the overall production and thus revenues of the country. Also, the government has to resort to more borrowings to augment its funds for developmental works in the country, further adding to the debt burden.
The huge gap between exports and ever increasing imports augurs ill for the American economy in general and the value of the dollar in particular. Increasing dependence on foreign countries for imports transfers the economic power into their hands and allows them to significantly influence policies at home. In addition, this also forces the US to borrow heavily from foreign countries.
10. Lack of Structured Plan for Debt Reduction
In spite of growing concerns about the debt accumulation in the US, the government appears to hold a laissez faire attitude to the problems in the US economy. In the absence of a focused debt reduction perspective and policies to match, the situation is snowballing into unmanageable proportions. Unless there are concrete measures taken right now to address these concerns, the existing debt will keep multiplying until the situation is beyond help.
In the wake of toothless reforms and policies, which are too far and too few to make a difference, the US economy is far from being in sound economic health. Unless a complete fiscal miracle is wrought by a financially savvy political leadership, the dollar will steadily lose its sheen as the benchmark currency of the world. Time only will tell if the US will end up the Greece way or hold its own.
