When thinking about the debt problems of the United States, I think it’s an interesting exercise to consider how we’d perceive the situation if the US government was an individual rather than a nation.
The current debt of around $13 trillion is inching closer every day to equaling the national GDP, which is around $14 trillion. Compare this with an individual who makes $40,000 a year and has nearly $40,000 in debt. Clearly that is a lot of debt to pay off.
The knee jerk reaction is to say we should cut spending to the bare minimum to focus on paying off the debt as quickly as possible. But the situation isn’t that simple. Because of the financial crisis and ensuing recession, the country is in a painful slump with extremely high unemployment. If we cut spending hard now, we run the risk of further depressing the economy, which would further decrease tax revenues, making it even more difficult to dig ourselves out of debt.
This is the debate that is raging back and forth between economists and financial analysts in the news media. They’ve even been divided into two camps, the Stimulators (who say we should up government spending to jump start the economy) and the Austerians (who say we need to cut hard now to pay off the debt).
Think of the US as a terribly underemployed person with a high level of debt. That person has a choice. They can either cut their spending to the bare minimum in an effort to pay off their debt, or they can invest in themselves (things like nice suits for job interviews, career training, etc) with the hope that the increased investment will lead to higher paying job that will help them pay off the debt later on.
The right answer, of course, is that it depends. From the Stimulators perspective, cutting spending now would deepen an already deep slump, sending us into years of depressed employment and productivity. They think that the only way to beat the slump is to spend our way out of it. We can pay off the debt when the economy is humming again. In the case of the individual, these are the people that think all he needs is a brand new suit and a bit of training to land that awesome job.
The Austerians think that more spending won’t help, it will only push the problem down the road. For the individual, they think thT his job prospects won’t be helped by an increase in spending, so it’s better just to start paying off the debt now, rather than increasing an already large debt.
The entire question hinges on how optimistic you are about the US economy. Do you believe that all we need is a jumpstart to recover to pre-recession growth levels, or do you think that the economy has permanently changed, and no level of stimulus will bring us back to the good old days?
No one can say for sure, but let’s hope that the policy makers in Washington make the right bet, as a wrong decision on either side could result in years of unnecessary economic pain.
