United States Financial Crisis

| by Shehani Wimalawansa and Sunil Wimalawansa

( May 29, 2013, Colombo, Sri Lanka Guardian) Over the past few years, the United States budget deficit has been escalating. While stopgap tactics by Congress in January has postponed the Fiscal Cliff, the sequestration still materialized. Additionally, approximately 24 million Americans are currently unemployed, wasting approximately 40 billion man-hours that could have contributed to the economy. When unemployment is high, government tax collections decrease while entitlement payments including unemployment benefits increase, further widening the budget deficit.

Rather than seeking to solve the debt by increasing the size of the government’s slice of the economic pie, the primary objective should be to grow the overall size of the pie, which helps all sectors. Growth cures debt. Robust economic growth increases employment and tax collections, while decreasing government transfer payments such as unemployment benefits, thereby reducing the debt ratio. The question is how best to spur growth. Tax reduction stimulates the economy by increasing disposable income for individuals and businesses. It restores consumer and investor confidence, stimulates the industry, and generates more jobs. While stimulus packages only target specific sectors, whereas payroll tax reductions benefit employees collectively. Thus, rather than manipulating fiscal policy, the focus should be on fostering an economic climate conducive to job creation.

Currently, the U.S. government spends more on “entitlements” (Medicare, Medicaid, pensions, Social Security, unemployment benefits) than it collects from tax revenues. Without rapid growth through massive job creation programs and facilitating an innovation-driven economy, and/or radical organizational modifications, the national debt will continue to increase. Over the past decade, the US government has deferred making decisions addressing the fiscal deficit, borrowed over three billion dollars per day, monetized and increased spending without sustainable job creation, allowed crises leading to chaos, and has even allowed escalating healthcare costs.

In 2012, the US government spent 3.8 trillion dollars, but collected only 2.46 trillion dollars, resulting in a budget deficit of 1.3 trillion. By December 2012, the government’s cumulative debt was 16.4 trillion, 25% of the world’s total GNP, and estimated to rise to $ 25.9 trillion by 2021. The government spends (A) 1.3 trillion dollars per year for security and non-security items (B) 2.37 trillion for mandatory programs, and (C) 260 billion as interest payments. The government needs spending cuts, as would the private sector when faced with financial difficulties.

The government sector only contributes to approximately 20% of the jobs. However, it is responsible for the maintenance and improvements of the basic infrastructure. For example, over 77,000 bridges need replacement, and this number is increasing every month. Over the next few years, the government should consider spending US $500 billion/year, perhaps raised via tax-exempt bonds, to improve ailing infrastructure, consequently creating new jobs and kick starting the economy. It should aid stabilizing the economy, improve investor and consumer confidence, incentivise the private sector to generate meaningful sustainable jobs, and allow robust growth.

This country needs rapid recovery through growth, new inventions and innovations, entrepreneurships, and enhanced tax revenues by increasing employment and business ventures. When government deficits are financed through debt-monetization, the monetary base and the money supply increase, shifting the aggregate-demand curve to the right and increasing prices and inflation. Continued monetization―quantitative easing (QE)―to cover the rising debt is a “death trap,” as has been vividly seen in Greece in 2011. Moreover, raising the debt ceiling or printing money (QE-n) are not real solutions for the current financial crisis.
After the elections, the focus shifted from unemployment to the Fiscal Cliff, budget deficit, debt ceiling, and Sustainable Growth Rate. The government mandatory payments amounts to 2.4 trillion dollars, which is similar to the total tax revenues collected. Thus, correcting trillion-dollar budget deficits with stringent austerity measures and/or printing money will not work. On the other hand, wise spending with massive job creation as an innovation-driven economy, would lead to a rapid recovery, and would reestablish financial solvency more quickly. We are in the midst of the worst recession since the Great Depression, and drastic spending cuts would further increase unemployment and hurt the most vulnerable.

The proposed tax increases would hardly touch the budget deficit. Moreover, increasing business taxes would decrease investor confidence, purchasing power, tangible growth, and lead to an increase in unemployment, which fuels a negative growth cycle. However, the generation of wealth and the creation of new jobs will increase tax revenues and decrease the budget deficit. Buying toxic debt during the subprime crisis, enhancing monetization, duplicating governmental and departmental redundancies and wastage, and spreading money into thin sectors as stimuli will not accelerate growth nor create jobs.

Currently, the country is trapped in a negative cycle of debt and unemployment. A strong economic growth and rapid recovery would automatically decrease the debt ratio. The United States needs firm and sound fiscal policies that include tax reforms, judicious spending, reduced wastage, and a guaranteed financial safe haven to continue to attract investments in the U.S. Meanwhile, the congress needs to repeal the Sustainable Growth Rate formula, reform immigration and insurance policies, and eradicate prejudice and injustice. We need political wisdom and national political unity to create and execute right policies. Implementation of such policies may be painful in the short run and unpopular in the media, but are imperative for the long-term macroeconomic, social and political health of our country. God bless America.