What we have to remember is that deficits don’t necessarily bring financial destruction. In some times deficits can be a good thing, especially if they are used for infrastructure development, basic research etc.
I like to think of the US deficit in the same way as I think about my household debts. No one likes to rack up big debts but occasionally you have to, when you buy a house, get married, or are unemployed etc. However you hedge the debts to risk that you will be gainfully employed and in an OK situation to pay off the debts. Usually you get to the point where you say to yourseld “holy shit” how much have I spent, and you cut back.
One thing to remember is that even though the deficit is a record level in dollar amounts. It’s still even with the deficits we saw in the 80’s under Reagan, and it’s much smaller than the deficits the US had at the end of WW II and the depression.
One can point out that the deficits at the end of WW II were caused by the war, and the earlier WPA projects, but in the end the debt was constructive, we won the war, we had enormous benefits from the WPA projects, generating plants, road improvements, mathematical tables etc.
What got the US out of any hot water from the earlier deficits were the huge economic booms that occured after the deficits were generated, and the revenue that was generated by the booms. Income taxes on the very wealthy in the 1950’s were huge, and that brought in lots of tax revenues.
In the 90’s you had the internet boom, and the tax revenues from capital gains taxes. The states especially made out well from capital gains taxes from the sales of stocks, which then really hurt them when the market went south in 2001. In the 90’s you had the deficit reduction perfect storm; there was gridlock in the federal government with the repubilicans holding congress, and a democrat president, so not a lot of huge spending initiatives went through, interest rates and inflation were low, and there was a huge stock market boom.
We will survive this deficit build up this time too, if the following hold true:
- The US economy and the productive part of the US population continues to grow. This is very important for raising revenues. Immigration is predicted to kept rising, and each new person will contribute to the US economy (most immigrants can’t get social services). Immigration may be the only thing that actually pays for the baby-boomers retirements.
-The US increases it’s investment in basic R&D. Unless we can continue to be innovators, the economy is going to fall. We might have the best Entrepreneurial business climate in the world, but unless we have ideas we aren’t going anywhere.
-We figure out what we are going to do about Healthcare. I believe it was Krugman that pointed out a few weeks ago that it isn’t social security itself that we can’t pay for, but it’s the increase in medicare expenses associated with the retirees that we can’t pay for. Without counting healthcare costs, the social security trust fund is still solvent. Of course this is going to require some sacrifices. Do we pay more for services through hirer taxes, or do we start rationing? Personally I’m willing to pay more, but most people aren’t. Of course this always brings into account drug costs, and the snake pit that drug costs are.
-Move up the age when one can start collecting social security. Lets face it, Gen Xers will have to wait until 70 to retire.
Remember, economic cycles still exist, and things tend to swing either way very quickly. What’s hurt US morale the most is that we have had a jobless recovery, mostly caused by increased productivity. This too can not go on forever, soon we will all be caught up in another boom cycle. The key is to realize that we have to hold off on the spending for a while. Know when to put the credit cards away, and starting eating in… I think the powers that be in government may be realizing this now.