The US Public Debt level: alarming, but controllable
Although it is clear that the US dollar has declined in value because of the continual triple deficits – in fiscal, trade and international investments – something still remains unclear: was the dollar sacrificed willingly or was that an inadvertent outcome? Besides, didn’t the US have appropriate economic, monetary and fiscal policies to counter the dollar’s persistent decline?
It appears not. The irony of the situation is that during the greenback’s long lasting slide we had appalling double-talk in the political arena: successive US Administrations declared that they were committed to a strong currency, yet delivered slowly but unmistakably the opposite.
Of the reasons cited for the erosion in the international value of the dollar, a prominent one is the level of US public debt: the result of continued government deficits which ended piling up.
Fortunately for the USA, it wasn’t always like that. According to the US Treasury’s data,12 years ago the level of public debt as a % of the GDP was around 60%; and in the early ‘70s it was at a memorably low of 40%. So there are good reasons to be hopeful.
It is clear that America needs to reclaim back its fiscal rectitude by combining inevitable spending cuts with some unpleasant tax increases. Neither is popular with voters, but both have long been waiting for transformative changes and not just incremental ones. Observations like “the country already has a high tax burden” and “the timing is wrong: we are in a recession” will only defer the unavoidable without addressing the problem. Yet, one thing is even more evident: without meaningful spending cuts fiscal rectitude is out of reach.
On the way there, shaking some of the dogmas away from our lawmakers would certainly help: no country can indefinitely tax its way into prosperity, no more than it can avoid insolvency by refusing to shrink its growing deficits. What is needed is a balance, but a balance nonetheless.
To be sure, ideological fixation with tax-cuts as the sole elixir for fiscal restoration – a controversial topic from the Reagan era with noticeably questionable impact in the recent Bush years – didn’t help much either. As Sheila Bair, the chair of FDIC, candidly observed in a recent speech that “ it is only over the last 7 years that the government debt doubled in size”, it is fair to point out that the recent deterioration in public debt did not happen from reckless overspending or political malice : a couple of unexpected events were mostly to blame.
First among them is the surge in defense and homeland security spending after 9/11 leading to the wars in Iraq and Afghanistan. Secondly, and more importantly, was the necessary and exceptional ramp-up in government spending following the Great Recession of 2008.
Adding the stimulus funding of 2008, the TARP (Troubled Assets Relief Program), QE1 and QE2 (the Quantitative Easing programs), the government has borrowed almost $3 trillion from the future performance of the American economy: an unprecedented spike in US Public Debt.
Despite the cacophonous partisan rhetoric and still lingering rancor, there simply was no other way to prevent an economic depression. The length and the severity of the present economic contraction, despite the emergency measures, prove that it could have been a lot worse.
That being so, there is still no reason to condone the public debt without examining the roles of monetary and fiscal policies in the preceding years: did the Fed truly help or hinder here?
Moris Simson, former high-tech executive who now heads a strategy consultancy, is a fellow of the IC² Institute at the University of Texas