Why is America in debt and how can we fix it?

[BobG]

Ultimately, it is simply a choice: the government chooses to be in debt. Why? Well, there are some legitimate economic reasons for running a small debt, but we're way beyond that. What it really comes down to is that it isn't fundamentally different from splurging and running-up credit card debt: It feels like free spending if you don't have to pay for it right away. And for politicians, that's great: you can give people the services they want without charging them the taxes it costs to pay for them. So the people are happier with politicians' performance and re-elect them.

Ironically, part of the reason for that is better communications.

There was a time when Congressmen accepted a basic responsibility to keep the government running. Yeah, during wars or national crises, we might run a debt, but the long term mode was you decided how much money you could bring in and the amount of money you brought in was how much you had to spend.

Congressmen made deals to do as well for their districts as they could, but there were usually no serious consequences if they didn't succeed. Regardless of success or failure, they'd go back and tell their voters whatever they wanted to and how were voters to know if they were telling the truth or lying.

Nowadays, voters know what their Congressmen have done or not done and hold them accountable. It's important to people in Congress that everyone in Congress win because losing half the time could get them all fired by their voters. Hence, these agreements where "I'll let you win lower taxes if you let me win higher earned income credit" type agreements.

Of course, that's changing, too, as special interest groups start holding Congressmen an even stricter level of accountability. It's getting to the point where Congressmen aren't being held accountable for losing - they're being held accountable for not burning down the houses of their enemies. Don't know whether things are changing for better or worse, but they are changing.

In some ways, I feel like we're moving from a representative republic run by professionals (even if some of those professionals are corrupt) to a direct democracy of amateurs.

Which isn't saying voters are stupid. It's asking how many voters have the ability to hold down a full time job, plus become an expert on how to run the government of the world's major superpower. I'm wondering if we weren't a little better off when we knew a little less and the professionals had the freedom to do what they pleased.

 

[jackwhirl]

The debt today is being financed at historically low interest rates, which cushions the blow somewhat. If interest rates should rise in the future, the pain will come back quick and come back hard. Does your wayback machine opine on the interest rates prevalent in 1989 for government debt?

http://observationsandnotes.blogspot.com/2010/11/100-years-of-bond-interest-rate-history.html shows 1989 interest rate on US treasury bonds of 8-9%, compared to rates today of about 2%. It also shows that today's rates, though low, are not historically unprecedented.

Again, the problem is not so much the interest rate on the debt (not saying it doesn't matter), it's that the AMOUNT of debt added each year by the entitlements programs is eventually going to be impossible to sustain at almost ANY interest rate.

So, if we come around to the second theme in the thread topic, how can we fix this?

 

[phinds]

Although the workings of the government are a bit afield from the original thrust of this thread, I was to follow up on BogG's comment:

Another thing that has been at least partially responsible for poor government (gridlock) is the relatively new rules (/laws / whatever) that prevent pork projects. In the past, the first step in a politicians learning to compromise with the other side was in getting help bringing home the bacon for his district/state and in return helping others do the same for theirs. This level of deal-making wasted a lot of money, which of course is why it has been banned, but it did get the lawmakers accustomed to working with each other. Now, it seems, there is no motivation whatsoever for any compromise of any kind.

 

[phinds]

So, if we come around to the second theme in the thread topic, how can we fix this?

It seems very clear that with our current form of government (government by opposing groups that totally demonize each other and cannot / will not work together) it cannot and will not be fixed until the crisis is upon us. Government by brinksmanship seems to be the name of the game, somewhat more for Republicans than Democrats but neither side is blameless.

I weep for my children's future.

 

[jackwhirl]

It seems very clear that with our current form of government (government by opposing groups that totally demonize each other and cannot / will not work together) it cannot and will not be fixed until the crisis is upon us.

Exploring this theme a little further, is there a form of government that can and has resolved a similar difficulty that we could emulate?
Is there a well defined difference in the form of government between Greece and Germany for example, or are financial fates a matter of luck?

I weep for my children's future.

Would you recommend a career in politics to them?

 

[phinds]

Exploring this theme a little further, is there a form of government that can and has resolved a similar difficulty that we could emulate?

It genuinely doesn't matter. We are not going to change our form of government, regardless of any evidence that there is a better system (not that I know of any that are better).

Would you recommend a career in politics to them?

Not unless there is a radical change in how our "leaders" operate. It's true that if no one tries, nothing gets done, but in today's climate, trying to change the government is nothing more than an exercise in what the military calls "pissing up a rope". You may get yourself wet, but you will have no effect on the rest of the world.

 

[wvphysicist]

The Balance of Payments crisis will be resolved in one of two ways. Either the bill will be paid or it won't.

If it is paid there are two options.
The mostly foreigners and largely Chinese could purchase a large amount of real estate in the US. This might leave some folks unhappy, but rumour has it that the US one of the few countries that allows such foreign ownership. It would be quite a shock to see most of America owned by foreigners.

Or US workers could see their working conditions degrade to resemble Bangladesh, so they would be competitive and remain so for likely thirty years, or as long as it takes to pay it off. This might result in much protest and upheaval.

Not paying is another option.
That may be easy with China. There has been a bit of contention in the South China Sea, and as China flexes its military a show-down over Taiwan is likely. As both nations are aggressive, especially the US, this could easily result in default, and possibly even a nuclear exchange.

 

[phinds]

... Not paying is another option.

Did you not read post #26 or did you not believe it?

 

[Czcibor]

Exploring this theme a little further, is there a form of government that can and has resolved a similar difficulty that we could emulate?
Is there a well defined difference in the form of government between Greece and Germany for example, or are financial fates a matter of luck?

Except a few harmful quirks of US political system (voting algorithm that encourages 2 parties polarization and draining money to your district; freedom of speech means right to be chatty with your money; possibility to sabotage central gov through debt limit / gov shutdown), that's mostly people. If the USA impose after WW2 its constitution on Germans, then they would anyway behave in their own, more compromise aimed way.

Assuming that there is a simple fix to US system, I'd say more decentralization. It would not solve problems, however, it would let a few crazy ideas being tested and no-one would dare to express his support for them any more.

 

[phinds]

It would not solve problems, however, it would let a few crazy ideas being tested and no-one would dare to express his support for them any more.

I can't figure out what you are saying in this sentence.

 

[Czcibor]

I can't figure out what you are saying in this sentence.

Imagine making the USA more decentralized and a state where Tea Party would have really big power and implemented a few utopian ideas.

Let them locally cancel safety net and apply gold standard.

Do you think that after a few years many people would try to convince you that such idea should be repeated in other places? ;)

 

[phinds]

Imagine making the USA more decentralized and a state where Tea Party would have really big power and implemented a few utopian ideas.

Let them locally cancel safety net and apply gold standard.

Do you think that after a few years many people would try to convince you that such idea should be repeated in other places? ;)

I believe you are right in that particular case, but it's a horrible solution

 

[Czcibor]

I believe you are right in that particular case, but it's a horrible solution

You know, now we have in Poland presidential election, some I'm in somewhat sadistic mood.

Honestly speaking I see one serious problem:
-when I suggest some undemocratic ideas to deal with populism - then people around tend to be unhappy;
-when I suggest some ultra-democratic ideas to deal with populism - then people around tend to be unhappy too.

 

[mr166]

Well they could start by rescinding 90% of the laws that were passed since 1970. Then they need to cut government employment to 70s levels and give control of everything back to the states. There will be another great depression as the economy sorts itself out but after the suffering is over we will have a healthy sustainable economy.

 

[phinds]

Well they could start by rescinding 90% of the laws that were passed since 1970. Then they need to cut government employment to 70s levels and give control of everything back to the states. There will be another great depression as the economy sorts itself out but after the suffering is over we will have a healthy sustainable economy.

Uh ... you're SURE about that, are you?

 

[mr166]

Yes I am sure of that. You can't have bigger government and less government spending both at the same time. Yes you could increase the tax base to make up the difference but that will only slow down the economy even more resulting in less money into government coffers.

 

[phinds]

Yes I am sure of that. You can't have bigger government and less government spending both at the same time. Yes you could increase the tax base to make up the difference but that will only slow down the economy even more resulting in less money into government coffers.

Yes, I agree on that side of your statement, but the other side of your statement expresses a degree of confidence in the states that not every one shares.

 

[mr166]

Well the more local the control the more responsive a governing body can be to local needs. The US was founded on the idea of strong local control and weak central government. The more we have strayed from this the more it has become impossible for an individual to support themselves. Don't get me wrong we need federal laws like pollution control and equal rights but sometimes less is more if you get my drift.

 

[mr166]

A prime example of the is the US Department of Education. Never have we spent so much on primary education and received so little in return.

 

[wvphysicist]

Did you not read post #26 or did you not believe it?

It sounds accurate but when have serious consequences ever been a problem for politicians?

 

[Drakkith]

A number of low-quality, off-the-wall replies have been deleted. I remind all members that normal PF rules still apply here. If you don't know anything about how the economy and national debt works, don't bother posting your 'solution'.

 

[MisterX]

Government debt is incurred as pivotal part of the normal functioning of the U.S. Economy. Material assets are generally increasing (for reasons such as population growth), and if the supply of money is not increased in turn, then eventually deflation related problems are bound to occur.

A pivotal process by which money creation happens is Federal Reserve lends new money to either the US Government or the private member banks. The money is further multiplied greatly using fractional reserve banking. Either way, the functioning of the economy is seemingly dependent on these major institutions incurring forever increasing amounts of debt. The debts will only increase; interests owed back to the Fed really can only be payed by continuing to take out more and more loans*. I believe this is by design. It could continue for many, many years in theory. Foreign governments complicate the picture, but it has been remarked by some that debt owned by other countries is not as big a problem as it might seem, due to the limited options of what to do with their dollars.

It's important to remember that these institutions (the Treasury and the primary banks) have access to "cheap money" at special interest rates well below that which normal person may access. Their debt is not like that of a typical person. There is more to say about this issue, but I thought it was worth chiming in with my understanding present understanding of financial reality in this country increasing US Gov't/member bank debt is almost a mandatory part of or present financial system.

*there are more extraordinary forms perhaps, but I think this is the usual process.

 

[SW VandeCarr]

I believe the US will always have debt problems as long as it continues to try to act as the world's policeman. Our defense budget is over $600 billion with China second, estimated to be about 220 billion. I admit to being a bit of a Rand Paul, but from the left side. I'm a veteran and have held these beliefs since the time of my service. While our infrastructure is collapsing, we are waging war in the mideast and facing down two nuclear powers; Russia and China. Once you get into a situation like this, it's hard to get out. I get it. If you look weak, you encourage bad behavior by other powers. If we get out of this without a war, I think we must insist that US's primary interest is to protect its own people The world vilified us for our attempt to stop "communist" expansion in SE Asia. Now we are making nice with Hanoi and they are still "communist". Meanwhile nearly 60,000 soldiers, airman and sailors were killed and several times number that maimed in the Vietnam fiasco. Our deficit will improve when we start spending more money on ourselves, and less on policing the world.

We can reduce our defense expenses by reducing manpower and increasing the development of drones and robots. I think a really effective missile defense is possible. I won't go into detail because the thread is about the US deficit. Right now we spend 3.5% of our GDP on defense. Germany spends 1.1% as Europe's leading economic power. Europe, more than the US, is facing an increasingly aggressive Russia, but the attitude is that it's our problem. The Poles don't trust western Europe to defend them and have recently greatly increased their military spending. Good for them. I've been to Europe many times. They generally regard Americans as uncultured fools if not the real threat to world peace. So let's be be less threatening and less foolish by leaving NATO and telling them to solve their own problems with Russia. Afaik, so far at least, Russia has not laid claim to North Carolina. We don't have to be in NATO to have normal relations with Europe.

Even with reduced defense spending by focusing on the next war, not the last one, we will still have debt. The goal should be, not to eliminate the national debt, but to limit it about 50% of GDP. Even that will take some time. We've run annual surpluses before and can do it again, but not if we insist on being the world's policeman.

http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures

 

[Czcibor]

We can reduce our defense expenses by reducing manpower and increasing the development of drones and robots. I think a really effective missile defense is possible.

But you said you wanted to reduce the spending? I mean such shields don't come cheaply...

I won't go into detail because the thread is about the US deficit. Right now we spend 3.5% of our GDP on defense. Germany spends 1.1% as Europe's leading economic power.

I thought that US aim after WW2 was to install as pacifist as possible gov in conquered Axis countries. I consider as a bit funny that you are unhappy that your policy... worked.

Europe, more than the US, is facing an increasingly aggressive Russia, but the attitude is that it's our problem. The Poles don't trust western Europe to defend them and have recently greatly increased their military spending. Good for them. I've been to Europe many times. They generally regard Americans as uncultured fools if not the real threat to world peace. So let's be be less threatening and less foolish by leaving NATO and telling them to solve their own problems with Russia. Afaik, so far at least, Russia has not laid claim to North Carolina. We don't have to be in NATO to have normal relations with Europe.

As Polish - I'd like to mention that we militarily supported USA in Afghanistan, Iraq and let you broke a few human rights concerning interrogating terrorist on our soil (for which my gov was fined by European Court of Justice) for implicit US guaranties.
Are you politely telling us that we're suckers?

 

[PeroK]

Meanwhile nearly 60,000 soldiers, airman and sailors were killed and several times number that maimed in the Vietnam fiasco. Our deficit will improve when we start spending more money on ourselves, and less on policing the world.

That would be US casualties. Not counting the estimated 1.1 million deaths the North Vietnamese suffered.

That's robust policing to say the least.

 

[Czcibor]

That would be US casualties. Not counting the estimated 1.1 million deaths the North Vietnamese suffered.

That's robust policing to say the least.

Such calculation is a bit tricky. How to calculate for example Korea, where similar policy worked, and those from Southern live in 1st world country, while the North live in effectively one big Gulag.

Or should we count only when policy failed, while ignore cases where the same policy worked just fine?

 

[SW VandeCarr]

That would be US casualties. Not counting the estimated 1.1 million deaths the North Vietnamese suffered.

That's robust policing to say the least.

Look up your facts before you post!

http://en.wikipedia.org/wiki/United_States_military_casualties_of_war

47,424 combat deaths, 10,785 non combat deaths, total killed: 58,209; wounded: 153,303; total casualties: 211,454

 

[PeroK]

Look up your facts before you post!

http://en.wikipedia.org/wiki/United_States_military_casualties_of_war

47,424 combat deaths, 10,785 non combat deaths, total killed: 58,209; wounded: 153,303; total casualties: 211,454

You're still forgetting the casualties on the Vietnamese side. But, I guess, they really don't matter to you, do they?

 

[Greg Bernhardt]

Keep discussion civil please and on topic to "Why is America in debt and how can we fix it?"

 

[PeterDonis]

A sovereign government has more options: issue more money, and/or devalue the currency.

It's worth noting that this is how the US government has historically dealt with most of its debt, at least since the Federal Reserve was created: it simply inflates it away.

someday you HAVE to pay it back

Not if you inflate it away instead.

 

[Evo]

Keep discussion civil please and on topic to "Why is America in debt and how can we fix it?"

Please everyone stay on topic. Off topic posts will be deleted.

 

[PeterDonis]

Yes, they have this option. However, it acts like a tax on wealth, and so has the same consequences.

The "wealth tax" effect is there, yes, but the actual consequences depend on how you print the money and who you give it to. Right now the Fed's main method of printing money is "quantitative easing", which means allowing banks to lend money (mainly for loans on real estate--not just residential but commercial) that the banks don't actually have--it gets printed on the spot when the loan is created. Technically, the bank does have a reserve requirement, i.e., it has to put up some of its own money before the Fed will print the rest; but for banks in the "upper reserve tranche" (I believe that's the term), which is basically any bank you've ever heard of, the reserve requirement is 3%--i.e., for a $500,000 mortgage, the bank puts up $15,000 and the Fed prints the other $485,000. That's not significantly different from no reserve requirement at all.

So the main beneficiaries of the Fed printing money are: (1) lending banks, who make money through fees on loan origination; (2) investment banks, who make money on the various creative derivatives built on top of the loans; (3) construction companies, who benefit from the increased demand for real estate; (4) realtors, same; (5) owners of real estate who happened to buy in at the right time. The combination of these is probably more than enough to offset the "wealth tax" effect of inflation.

 

[Dotini]

We are in debt, nationally and globally, because we have borrowed more than we can hope to ever pay back. Devaluation of the currency is the obvious fix, though it will be painful for many, and likely be the cause of unintended consequences.

Proposition: If we democratically choose to inflate, then suffer the most terrible of consequences, our actions will have been justified by their well-intentioned motives. Otherwise, progress is impossible.

 

[OmCheeto]

Well the more local the control the more responsive a governing body can be to local needs. ...

Are you familiar with the City of Bell scandal? It seems to contradict your assertion.

In the end, seven Bell city officials, ... were convicted on graft and corruption charges and given sentences ranging from probation to twelve years in prison.​

I suppose, since you used the phrase "can be", your assertion isn't totally wrong.

But to me, the answer as to why we are in debt, is simple: We've elected officials who put us there.
As to why we keep electing these boobs, is somewhat complicated.
And I'm sure we've discussed it before, so I won't go there.

 

[aquitaine]

But to me, the answer as to why we are in debt, is simple: We've elected officials who put us there.
As to why we keep electing these boobs, is somewhat complicated.
And I'm sure we've discussed it before, so I won't go there.

We kind of have ourselves to blame for that one. There are too many who wanted something for nothing, which can last for quite a while until we start running out of other people's money. But now that it's starting to happen it's a question of which promises are we going to keep and break.