Economic Planet | Debt: The American Dead End

The size of public debt is a problem in many countries. In the United States, where this question is periodically brought up in the news, it is not a topic that becomes a real problem.

The US federal debt in January reached 32 trillion US dollars, more than 32 trillion US dollars. This is a permanent record and it is also the limit beyond which the federal government cannot borrow to meet its obligations without the consent of the opposition.

The consequences of this ban are significant: There is no money to pay federal employees and services, and the government is paralyzed. In the end, the country may find itself in default on its debt, which is the worst case scenario.

Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen also warned elected officials that not having an agreement to raise the debt ceiling would be a disaster and could lead to chaos in financial markets.

Both insisted on the “extremely negative consequences” and “long-term damage” of the debt crisis to the US economy.

In 2011, an extreme resolved debt crisis led to a downgrade in the credit rating of the United States by Standard & Poor’s.

While waiting for a potential deal, the US administration has been forced to buy time by deferring certain payments and suspending new debt issuance, pushing back the deadline for a default into the summer.

The existence of a legal limit for government indebtedness stems from a good principle, which is the control of public spending. Since 1960, the debt ceiling has been raised 78 times according to the Treasury Department, most of the time without a major crisis, but a growing divide between Republicans and Democrats makes the practice increasingly difficult.

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Today, Republicans, who hold a majority in the House of Representatives, are in a position to demand deep spending cuts from the Biden administration, citing the dangers of debt spiraling out of control.

The US federal debt has doubled over the past 10 years and now stands at 120% of GDP. This is one of the highest proportions of Organization for Economic Co-operation and Development (OECD) countries, after Japan and Italy.

Gross indebtedness, the total annual government deficit, has accelerated with corporate tax cuts enacted under the Donald Trump administration, spending programs initiated by the Biden administration and the COVID-19 crisis.

As interest rates rise, so does the weight of that debt and, according to many observers, including the Secretary of the Treasury, could become unsustainable in the long run.

Spending cuts or tax increases

The news of the impending bankruptcy of the American economy, one might say, is greatly exaggerated, paraphrasing author Mark Twain. The day when investors around the world will no longer want to own US debt securities is still a long way off.

Above all, the country has the means to put its financial affairs in order. For Republicans, the means are straightforward: cut federal spending, though they differ on what to cut.

The budget that President Joe Biden presented last week, even if he has no chance of adopting it, launches negotiations. He proposes additional spending, but also a 10-year deficit-reduction plan to be funded by higher taxes on the wealthiest.

There are certainly expenses that can be cut in a US-sized budget, but there is also a lot that needs to be done on the revenue front. The United States is the rich country that collects the least taxes from its citizens, of all forms combined.

Consumption taxes, which have the advantage of minimizing damage to the economy and targeting the rich, are also used less in the United States than in other OECD countries. It represents 16.6% of tax revenues in the United States, compared to an average of 32.1% in industrialized nations.

Americans are tax-sensitive and elected Republicans should not be counted on to accept an increase in those taxes, even to reduce the deficit. And even if it becomes embarrassing when more and more of the super-rich start demanding such a raise.

Between spending cuts and tax increases, the middle ground has always existed, but it’s likely to be ignored again this time around. Until the next crisis which one day will be serious enough to cancel this deadlock.

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