The United States’ federal debt is $15 trillion. More than $1 trillion is being added to the debt each year, owed to central banks of countries (the biggest being our own Federal Reserve), investors in bonds, financial accounts and so on. So, how come the government won’t cut spending or raise taxes? Or both? The simple answer is Republicans generally oppose raising taxes, and Democrats generally oppose cutting spending.
The complex answer is that in a poor economy, it’s difficult to make significant changes like increasing taxes or cutting spending when most people (rightly or wrongly) believe deficit spending is best in a poor economy. However, the U.S. is stuck in a Catch-22 where it must either sacrifice now, or sacrifice significantly later on. Most politicians are also interested in keeping their jobs, so losing support by making significant changes to the budget won’t help their re-election chances. This is not to mention Social Security, Medicare and Medicaid make up nearly 50 percent of the budget. These also cause the most outrage when politicians attempt to cut or reform them, because these mostly go directly to senior citizens and poor people. Former president George Bush proposed privatizing Social Security when he was president, and that idea barely got any traction.
Another 20 percent of the budget is military and defense spending. Both Secretary of State Hillary Clinton and Secretary of Defense Leon Panetta warned cutting defense spending could jeopardize national security. Whether or not that is true, there is a lack of political will to touch defense spending except to draw down on the wars America is currently in. The remaining 30 percent of spending goes to all the various government agencies such as the Departments of Energy, State, Education, Transportation, Homeland Security, etc.
To balance the budget without raising taxes, almost 40 percent of current spending would have to be cut. To balance the budget without cutting spending, taxes would have to be increased by almost 60 percent. Although the rich have paid an increasing share of taxes, the eventual solution the government will come up with could be a modest cut in spending and modest increase in taxes on the rich. But it’s difficult to say whether even this will be enough to prevent a crisis if the U.S. ever reaches a point when it simply cannot borrow any more money.
If we reach this point, the only way around it will be for the Federal Reserve to create large amounts of money out of nowhere, which will cause high inflation. Hopefully, politicians in Washington get the willpower to potentially sacrifice re-election and make tough changes because $1 trillion deficits each year is not sustainable. It won’t be easy, but the government has been living beyond its means for years and owes it to the future of this country to do something about what could be the most significant future threat to the global economy.
