Anyone who’s been following the news knows that President Obama has proposed a $3.94 trillion budget. This budget will become a $1.17 trillion deficit in 2010. We’ve all heard talk about how dangerous this deficit is, but what makes it so?
For starters, what is a deficit? Deficit, as we are taught in economics, is when a government spends more than it makes on tax revenue. Said government goes into deficit by borrowing money from other countries. During World War II, the national deficit was nearly twice the GDP of the United States. Since then, it has hovered around 60 per cent, dipping lower at times. With the current economic crisis, the deficit could swell to between 85 and 90 per cent of the American GDP.
Some politicians and policymakers argue that going into deficit is inherently dangerous; others disagree. Like most political issues, drawing the line is difficult. There are times when it is absolutely necessary to go into deficit: during a recession, cutting taxes and/or spending can bolster an economy. While these activities will shrink a surplus or cause a deficit, sometimes it’s worth it.
However, every time the U.S. plunges further into debt, the dollar is increasingly dependent on foreign nations. This has huge implications for the economy. In 1997, the Prime Minister of Japan considered selling some of Japan’s $300 billion U.S. Treasury securities. The DOW plunged. Should Japan, or any multitude of countries considered selling off their U.S. securities, the U.S. dollar would fall. Lately, analysts have regarded the U.S.’s mounting debt as a serious security threat.
And what happens when borrowing can no longer be sustained—when countries will no longer lend to an indebted nation? To answer, one needs only look at parts of Eastern Europe today. Countries are forced to follow in the footsteps of the Great Depression’s President Herbert Hoover and raise taxes as economies collapse. Economic theory tells you that raising taxes during a recession will only make things worse. However, when a country cannot afford to spend, its hand is forced.
What does this mean for the U.S.? They need to spend. They need to go into deficit and get out of this recession. What does it mean for the future? The U.S. needs to pay off those debts.
