The Debt Debate, Part 1: Missing the Point
What do we do now Lady Liberty? Source: www. blog.thesohotel.com
Apparently, a deal is done. Reports late on July 31st are describing an agreement between President Barack Obama and Republican congressional leaders that would allow the U.S debt ceiling to be raised, combined with significant spending cuts – all pending a vote tomorrow. It appears as though the twentieth century’s most prolific economic power will not default on its debt. Disaster averted. Well, sort of…
Deal or no deal, this doesn’t exactly fix the real problem. For years, the United States has been spending more than it can make. Simplistically speaking, it’s a recipe for disaster. Just like you can put purchases on your credit card assuming you will get some future revenue to cover them, a government can borrow in order to make ends meet – temporarily. If no increased and sustained source of revenue is secured, debts continuously outrun the ability to pay. And just like a personal credit card, the interest and principal never go down. The problem the U.S. (and the world) still has, even after this deal, is that the world’s best consumers (the ones that buy products and fuel a big chunk of the world’s income) is in a nasty slump.
The debt crisis has mostly been a political game – not an economic debate. It’s been Republicans pushing their belief in small government and low taxation versus the Democrats’ protection of programs and attempts to tax the country’s most affluent members. The argument has raged on until this eleventh hour because both sides wanted to prove a point and try to win votes in preparation for the 2012 election. In short, a public relations spectacle.
What will/would happen if the U.S. defaults? To quote the headlines: catastrophic and very bad things. But debt is relative: many have said that even before a default, the U.S. was already bankrupt. It’s true. If you owe that much, the only thing keeping you afloat is the fact that your bill collectors keep increasing your credit limit. That doesn’t fix the problem! So, as long as you can keep getting credit, you can keep spending and artificially be “rich”. Again, the recent spotlight on the debt ceiling crisis is not solely a 2011 issue – this has been developing for years, and so have the problems.
Finally, U.S politicians may have been debating on the wrong subject. The fight has been over taxes and spending. Granted, both of these need to be addressed but they are not the answer to long term growth. The apparent agreement will only stop the financial bleeding – if that. Again, taking the example of personal credit card debt: if you can start spending less (cuts to government programs) and find some extra cash (increase taxes) than yes, you will be able to pay the interest and some of the principle on your debt. But in order to pay the whole thing off and start making money, you need to completely change your revenue generating model. Ideally, you would need to find a much more lucrative and higher paying job to support your spending habits. Thus, Republicans and Democrats should focus their energy on creating solutions to find new money making activities. Goods and value that can be exported, things the world needs, or even better: what we will eventually need.
Source: www.allposters.com
In the spirit of analogies: just like someone trying to lose weight and get in shape, they must eat right (control spending) and burn more calories (generate new revenue). But dieting is not enough – you can only cut out so many calories. Like spending, you need calories for survival. What’s left if you can’t turn to additional fiscal dieting? You need to work on the other side of the equation: the exercise (i.e. generate revenue). And the good news is that there are many ways to do that. More good news for the U.S. is that they have the tools to do this.
This situation has made people compare the United States to Greece: bankrupt and badly run. But the U.S. is not a small underdeveloped country. It has land, resources, and a large population willing to capitalize on opportunities. Therefore, a plan is needed – something to propel the U.S into the twenty-first century. In a way, this represents a chance for the U.S. to show the leadership and industriousness that made it a superpower in the first place. Next week, we look at what that plan could be…
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