Mar 03 2008
America… bankrupt?
Published by Jason Welker at 7:04 pm under AP Economics,Fiscal Policy,Macroeconomics,Monetary Policy,Politics,Taxes
The Rutherford Institute: A Crisis in Democracy: Are We Going Bankrupt?- Commentary
Environmental Economics blogger John Whitehead wonders whether America is going bankrupt, and if so, what can be done to fix the problem.
According to our text, (McConnell and Brue’s “Economics, 17th ed.”), “The large U.S. public debt does not threaten to bankrupt the federal government, leaving it unable to meet its financial obligations. There are two main reasons why, refinancing and taxation.”
McConnell and Brue argue that when past debt comes due, the US government will always be able to pay its creditors (i.e. the US public, financial institutions, branches of the federal government, as well as foreign banks and citizens) by selling more debt certificates (securities) to others who have faith that the US will continue to meet its debt obligations in the future. This is the equivalent of paying off one credit card with another, incurring even more debt in order to pay off past debt.
However, in the case that the government ever finds it hard to issue new securities, either due to a loss of faith among investors in its ability to repay its debt, or fear of economic instability in US growth, it can always resort to the more drastic measure of actually increasing taxes and reducing spending on public goods, using taxpayers’ money to meet its debt obligations. For these reasons, conclude the textbook authors, the U.S. government is not at risk of bankruptcy.
Or, is it?
According to Whitehead:
The fact that our nation is nearing bankruptcy has become what David Walker, comptroller general of the United States, calls “the dirty little secret everyone in Washington knows.” Most politicians, says Walker, are aware of the impending financial crisis but reluctant to do anything about it. After all, it is not politically expedient to increase taxes or trim spending, but this is exactly what needs to be done…
Walker, who recently resigned after serving as the government’s chief internal watchdog for a decade, concludes that the nation’s “current standard of living is unsustainable unless some drastic action is taken.” But, as usual, when we leave the problem-solving to the politicians, what we end up with is bigger government, more bureaucracy and a larger federal deficit, which is projected to total $410 billion for 2008. (The national debt, which is the total amount of money owed by the government, is currently estimated to be over $9.2 trillion.)
We are living in a house of cards that’s on the verge of crashing around us, and yet most Americans remain oblivious and continue to spend beyond their means. But, as Reich notes, “That era is now coming to an end. Consumers have run out of ways to keep the spending binge going.”
Whitehead believes Americans themselves need to reign in their spending, bringing their expenditures more in line with their incomes. If this is the path to individual financial security, then likewise it must hold true for the nation as a whole. What scares Whitehead more than the growing US public debt, however, is who holds that debt. Today, almost 30% of the $9.3 trillion owed by the US government is owed to foreigners.
According to economist James Galbraith, who Whitehead quotes, this puts to the test the very foundations of democracy, which in the past have relied on the relationship between America’s creditors (the holders of the debt) and the government itself. In 1945, almost all of America’s debt was held by Americans themselves, and the government acted in the interests of the American people. Today, the scales have tipped, and less than 10% of America’s debt is held by American citizens.
Galbraith concludes: “…the disappearance of the citizen-creditor forces a question. Can democracy survive when its financial roots have been cut? The scale of public debt is not the issue, but its ownership is. Can a country—whether the United States or any other—be truly democratic if it is in hock to banks and foreigners? …To put it bluntly, are we still a democracy? And, if not, what would it take to bring democracy back?”
We know what must be done.
First, we need to elect fiscally responsible representatives with the backbone to resist political pressure to spend what is not there. We also need to stop putting ourselves in hock to foreign banks and nations. And we need to put a stop to the financial hemorrhaging related to the Bush Administration’s war on terror. For example, over the past six years, the U.S. has disbursed to the corrupt government of Pakistan about $80 million monthly, or roughly $1 billion a year. Yet according to the Washington Post, few receipts are provided to account for how the money is used or where it ends up. That’s just the tip of the iceberg when one considers that we spend at least $1 billion a week in Iraq on military operations alone. Just imagine how those dollars could be put to use in our own ailing economy.
Certainly a fiscally responsible government would result in security and freedom such as that enjoyed by fiscally responsible individuals, free of debt. But just like the fiscally responsible individual, who so responsibly pays off every credit card every month, getting into the habit of balancing a budget, especially when the budget starts out so woefully unbalanced, poses serious challenges. Here’s an example:
Imagine you’re an individual earning $100,000 a year. Great salary, right? Hold on, you also owe $75,000 in credit card debt. What is the first thing you’d do if you earned an extra $10,000 next year? Go buy a new car? How about take a vacation to Europe? No? Well, what then? Logically, you’d start paying off the $75,000 debt, with the goal of becoming debt free sometime down the road.
This is America today. We’re a country with a national income of $13.5 trillion, and a national debt of $9.3 trillion. Fortunately, 70% of that debt is held by Americans themselves, so we essentially owe ourselves $6.5 trillion. When this debt is repayed, it does not represent a loss of wealth from America, rather a transfer of wealth from Americans to Americans, neither diminishing nor enhancing our overall spending power.
However, every year the share of our debt held by foreigners grows. Today it is around $2.8 trillion, the repayment of which represents a transfer of wealth from Americans to foreigners, making us poorer and them richer.
Tightening our fiscal belts may be tough now, but necessary to restore democracy and financial stability to our nation. This article by Whitehead makes some interesting arguments for steps the U.S. should take now to assure security and prosperity for future generations.
Discussion questions:
- What do you think Whitehead and other economists who share his views think about the recent fiscal stimulus package passed by Washington?
- Why don’t politicians seem to take serious measures to balance the US budget and begin paying off its debts?
- Should we worry about the US debt? Why or why not? Who’s to say we can’t just keep refinancing the debt indefinitely?
- Are you or is anyone you know in debt? Is personal debt something to be concerned about? Why or why not?
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About the author: Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course.
Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this authorRelated posts:
- Will the stimulus package “crowd-out” private investment and reduce long-run growth potential in America?
- How big is the government spending multiplier in America? Well, it depends on which economist you ask…
- The Big “C” – America’s crisis of confidence and the Great Recession
- Too much debt or not enough demand? A summary of the debate over America’s fiscal future
- Advice to Republican presidential nominee on taxes – “raise ‘em!”
Debt makes the world go 'round, but where do we draw the line for what constitutes too much debt for any given nation? Having national debt is part of the economy, but in the US, it has grown to a sizable and unacceptable proportion in recent times; it's time for Americans to step up to their patriotic duty and do something about it. Just like the fact that alot of personal debt will do you harm, the increased national debt will hurt the US's economy – and 'in the long run' is coming sooner than we'd like.
Spending the money handed out by the stimulous package will only encourage people to spend money that they don't have, or that they think will continually be given to them. It is time to save your money, get yourself out of debt and, in turn, get the US out of the ridiculous amount of debt in which we now find ourselves. Start small, finish big. And not in the Red.
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In my opinion, I don't think Whitehead agrees with the economic stimulus plan. It's just giving Americans the idea that they are wealthier, which most of them won't be when they spend their $1,000 from the government on a vacation, new clothes, etc. After they buy whatever it is they buy, they will be right back at square one, gaining no wealth, just maybe some materials. The people who put their money into savings will benefit though, but that is really not what the government wants us to do with that money. Most people become so blind sighted when they are given "free" money that they spend it willy-nilly wherever they want…which is really not benefitting them or our economy in the LONG run.
I think the reason politicians don't take serious measures to reduce our debts is because it is such a bold move to make. It would requre possibly raising taxes, and probably a lot of short term dislike from American citizens..but I believe in the long run, we would benefit from trying to pay off our debts. People may complain about higher taxes to pay off our debts, but I think it would be better to have people mad about taxes for a short time than living in a country that has gone bankrupt. Short term pain for long term gain (I attribute that quote to my econ teacher, mr lauridsen)
Politicians have become a lot more neutral than they used to be in order to appeal to the most amount of people.
Finally, I think personal debt is a huge thing to be worried about. If the majority of the people in our country are in debt, I'm sure our nation's debt situation would reflect that. With less Americans in debt, we are able to invest in more things to help our own economy. It is impossible for one person to reduce the US's large debt, but if everyone just contributes a little bit, and keeps themselves debt-free, maybe it could help.
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I guess that Whitehead and other economists who share his views are unhappy about the recent fiscal stimulus package because it is encouraging spending when the US is losing democracy to over-expenditure. But they must agree that it is necessary. First of all, without any economic growth, the US cannot pay back its debt. Although 70% is owed to Americans, no household can forgo a majority of their income to pay for debt. However, if aggregate demand shift out and there's an increase in real GDP, employment, and tax revenues, the government can use the additional revenue to buy securities off American hands. Furthermore, there is really no reason to anger the American public by increasing tax or cutting government spending because war in Iraq is coming to an end due to loss of American confidence, world criticism, etc.
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I'd guess that Whitehead et alia would disapprove of the stimulus package; the package is trying to cajole Americans into spending more, in order to combat the recession we're in. The problem with this, as already mentioned, is that it puts money into the hands of consumers who, still thinking they can overspend without any real ramifications, are just going to spend more. Well, that's fantastic — why not drive the nail in deeper? And the reason why politicians aren't taking any real action against the deficit is for PR reasons, really. Who wants to be remembered as the guy who raised taxes? In reality though, it's like a mother feeding her sick and stubborn child cough medicine; [most] people find that it tastes disgusting, but that it helps in the end. It's a serious problem; confidence in the government isn't an endless well we can keep on drawing from.
I do have a question though: isn't saying that America is "losing democracy" over this a bit excessive? Stability is at risk, yes…but democracy? It seems like that word's being used a bit too loosely. I mean, c'mon.
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Going back to the meat of this issue. The description given is a lot like our government having a trade deficit. The author says, "However, in the case that the government ever finds it hard to issue new securities, either due to a loss of faith among investors in its ability to repay its debt, . . . using taxpayers’ money to meet its debt obligations." The whole idea being debated is no so much if the U.S. is going bankrupt, because we are not. The question is how to pay off the debt. This brings me back to having a trade deficit. The problem is that the majority of people are spending more than they have. This forces them into debt. The problem is, when everyone is in debt, who do we borrow from? The answer is other countries. We borrow money from China as an example. We do not necessarily depend on China, but on the relation ship we have with it. We send the Chinese market money by buying Chinese goods: the "made in China" exports, just so in return we can borrow that same money to pay off out debts. Because we over spend, we under save. If we really want to "rescue" the U.S. economy, we don't need to buy "made in USA" goods instead of the other guys, we need to not spend at all and save. In the long run, saving allows us to have money for those future "big" projects. The one's our economy really needs. At first the US economy might look bad, but it is a short term pain, for a long term gain. Save more!
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The problem with politicians today is that they do things that would help win them reputatio and legitimacy, instead of impelementing measures that could really help the country in the long run. Americans don't like to hear that there will be a tax increase in order to help their country get out of debt; they prefer to hear that there will be a tax cut and they can spend more, even if it means only helping alleviate the debt by a small amount. From what I read above, I think that Whitehead would be against the fiscal policy that Bush and his administration recently passed. He's probably advocating for an increase in taxes so that the people would stop exceeding their incomes.
While I recognize that this US debt is a serious problem, I also agree with Elaine that by stating the States is losing its democratic ways due to the debt is stretching it a bit too far. However, this problem shouldn't be taken lightly because Whitehead is correct in stating that we can't keep refinancing the debt indefinitely. There will be some point where the money supply will just run out (probably because a foreign country will start owning nearly all of the debt) and we'll be screwed.
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Certainly, Whitehead isn't very pleased with the stimulus package. Whitehead sure as represented above is very concerned with the United State's debt. As mentioned, if the 9.6trillion debt is hold by Americans then when it is payed back, it does not represent a loss of wealth from America, rather a transfer of wealth from Americans to Americans, neither diminishing nor enhancing our overall spending power.However, the problem underlying is that nearly 3 trillion debt is hold by the foreigners and essentially, the US are gradually becoming pooer and the foreigners are becoming richer. and if this issue continues to grow, the the confidence within America sure doesn't seem bright.
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Whitehead does not seem to approve the fiscal stimulus package. The fiscal stimulus package will certainly increase spending, but the US has to stop spending what is not there. The debt is piling up and what is scary about this is that a lot of this debt is going to foreigners which will result in transfer of wealth to foreigners.
Politicians, they want to look good to citizens. By looking good means increasing government spending and tax rebates, but this piles up debt. To balance the budget, they will have to decrease government spending and increase taxes. Nobody is going to like that.
US should be worried about that. If an individual has debt, they are always worried about it. The US government just sells more securities. Individuals its just like paying off one credit card with another and debt piles up. For now it may seem as if it's okay but eventually there is going to be debt you have to face.
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You know, if they just made Economics a mandatory course like Math or English, politicians really wouldn't have such a big problem with raising taxes… I disagree with the fact the US has to stop spending whats "not there". Sure, the debt is piling up, but at least it makes it so the US has a chance to enter the expansion phase of the business cycle. While the fiscal stimulus package hasn't yet to be employed, I don't think it'll succeed as well for the reasons people have mentioned above. If the US chose to stimulate Aggregate Demand directly through… say Investments in technology (you know.. the same thing that propelled the US economy in the 90s with Clinton), it may be more effective.
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Should we worry about the US debt? Why or why not? Who’s to say we can’t just keep refinancing the debt indefinitely?
I don't think we need to worry about the US debt now since US has the strongest economy in the world. It won't really go bankrupt.
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I think politicians will do anything in order to get the peoples votes. So they'll say things such as lowering taxes to make the people want them as their leader. This causes the economy to destabilize. I am not worried about the US being in debt because a lot of countries are in debt to the public. Also a high percentage of the people they're indebt to are the citizens of America. Also people are always that a country might go bankrupt.
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