Jul 3, 2011

National Debt and Debt Limits

We currently have a great deal of angst about our growing national debt. It is a serious problem that needs to be addressed but it is not quite as great a problem as the doomsday folks think it is.  The link below shows the debt of nations relative to their GDP (Gross Development Product).

Japan is by far the worst with debt of 225% of their GDP. Germany, Italy, and the United Kingdom are all worse then the US. The US is rated 36 among the nations and is less then the median among all countrues. Our debt was 59% of our GDP. But is is growing very rapidly.

The graph below shows that our problems are much less then Japan and about on par with Germany.

This is still a serious problem that needs to be addressed, but not before we get our economy working well again. Cutting government expenditures now would be similar to what we did in the early years of the Great Depression, which only served to make our economy worse.

But after the economy is working well again we must limit the growth of expenditures and raise taxes. It is of course very difficult to gain consensus on this action. Raising taxes is a good way to lose your elected office. But eventually it must be done. We have to keep our government solvent. 

The Republicans are running a campaign of cutting government cost. But what did they do while they were in complete power? Very little - they kept spending. It is not that easy to do and requires cuts to major entitlements such as Medicare and Social Security. And no elected official who wants to keep his job wants to do that.

The Democrats are also now calling for tax increases. But what did they do when they were in complete power?  Very little - they did not raise taxes, just kept raising expenditures. Very hard to raise taxes if you want to keep your elected position.

So what will happen?  Well, what should happen is that we increase taxes and lower benefits. And probably all of Congress needs to jump together. But since it means the end of their elected career, the decision keeps getting put off for the future.

The National Debt limit increase forces some action. We must increase it - the outfall for a default is to great and would really damage the economy.  So our elected officials will increase the debt. But whether their will be a benefit cut / tax increase involved is not clear. Raising taxes in the midst of a bad economy is not a good idea.

Tough time for the country and an elected official. What will they do?  I bet they raise the debt limits and do a little tax hike / spending cuts, and kick the major decision down the road. But who knows? Stay tuned.