US Budget Deficit

[cullenbohannon]

Hey @attheedgeofscience , i thought i would post my questions and thoughts about the budget deficit in another thread, if you get a chance I would really appreciate any thoughts you have on my own thoughts. I remember you use to have your name on the profile so i looked you up and you're educational background was very impreesive. So again any thoughts you might have id appreciate, if not no worries.

as can be seen from the chart below, there has been a roughly 40%-point increase in the debt-to-GDP ratio over just four years. That expenditure is essentially what the government of the USA has spent in order to quell the (unpopular) unemployment rate (in national economics you pay "something" to get "something else", loosely speaking).

Im sure that played a part of it but also the shrinking tax revenues from the shrinking economy, social security, medical costs like medicare and medicaid, food stamps ,unemployment and military spending.

having high debt is also (very) inefficient to the functioning of the economy due to the added interest rate that must be paid (as a "penalty" on top of the loan installments)

Agreed, the Federal reserve has kept the interest rates very artificially low, and plan to slowly bring it back up which will increase the deficit even further.

Ultimately, the USA government will have no choice but to raise taxes (citizen and/or corporation) in order to address its debt.

Just curious as to why you think this is the case? Do you not think that lowering spending and trying to grow the GDP would work. I know the GDP in the USA is growing, it more then it was previous to the recession and that employment is up, although i suspect that the people aren't necessarily finding the high paying jobs that were out there before the financial crisis occurred.

EDIT I think this kind of helps to answer the previous question.

On slight side-note: in any economy, there are smart ways of addressing economic problems. An example of that could be the number of tinnitus sufferers not contributing to the GDP due to their inability to work (about 2 million in the USA suffer from severe debilitating tinnitus and may well be part of that statistic). Suppose that proportion of the population was suddenly to join the workforce (provided there is enough "demand"), then "supply" would be able to boost the GDP in a new equilibrium on the S-D Curve (more GDP = more taxes without raising the tax rate = good news for the average citizen!). The same applies to other patient groups, for instance. Debilitating and impacting sicknesses is therefore an important factor to address for non-rare diseases and any government should have a self-interest in looking into it (i.e. attempt to cure the underlying problem).

President Obama has - in my opinion - addressed the problem intelligently by raising taxes for the richest part of the population (taxes are already very low in the US and hence the increase is really non-impactful, financially speaking - i.e. compare it with income tax rates of some 60% within the EU for maximum earners). However, the proposal was not exactly popular with the Republicans if I remember correctly. From a European, and hence an unbiased point-of-view, the failure to accept the proposal shows the plain simple stupidity of those in power who represent the American population (= people need to understand that problems have to be addressed and cannot swept under the carpet).

Yes i remember this as well, i'm not entirely sure how it the progressive tax plan turned out but i know recently although im sure many wont believe this so ill post a link, but the effective rate as been extremely low under Obama.
http://www.washingtonpost.com/blogs/wonkblog/wp/2014/04/11/your-taxes-are-really-low-in-one-chart/

 

[ruben ruiz]

The government spends more on military media than hearing and its associated problems.

 

[attheedgeofscience]

Just curious as to why you think this is the case?

Well, the basic background (= "premise of argument") for my statement comes from the prediction by Congressional Budget Office which essentially mentions that the current spending and tax rates of the US Government leads to a budget trajectory which is "unsustainable" in the long run.

When something is financially unsustainable, it is because it will eventually lead to a debt whereby the ability to pay interest + loan installments will be of such a magnitude that lenders will no longer be willing to lend the country any more money or the country itself cannot make the agreed payments (= sovereign default). At some point the credit rating of the country will also suffer which will make it harder + more expensive to acquire a loan (remember the interest rate of a loan factors in the financial risk of the loan, so higher risk profile = higher interest rate = more expensive to borrow money). All these "things" are undesirable for a country as it makes it harder to maintain and control a stable economy ("stability" is essential in any economy - nothing is more important, in fact).

So what can a government do to address the issues (i.e. reduce the budget deficit)? Well in macroeconomic theory, a government has essentially two options: decrease spending and/or increase taxes. The reason I mentioned taxes rather than a reduction in spending is because dealing with a budget deficit via spending cuts is quite difficult to accomplish in practice i.e. one primary way of doing that is to "fire a government employee" who therefore is no longer on the payroll. But who do you fire? You cannot just fire someone short term, because everyone is essential short-term i.e. if you fire a nurse "here and now", the patient will not get treated or if you fire the "payroll accountant", then the employees will not get paid. So layoffs need to be planned and are also unpopular (with the government) and create macroeconomic problems of their own i.e. if you fire a government employee, that individual no longer contributes to the GDP, does not pay taxes, and will require government aid. So all-in-all not an enticing solution. Taxation is needless to say not very popular either, but if you tax the most wealthy part of the population, then that is very manageable indeed. Economically speaking, therefore, the proposal by President Obama makes a lot of sense and is a very easy task to accomplish and with immediate effects i.e. the minute you implement it, the government will start to see a reduction in the deficit (not always so with spending cuts, because if you fire a government employee, and besides the problems already mentioned with that, what's stopping that part of the government to rely on overtime of other employees and/or recruit temporary staffers?).

I don't think the US can avoid an increase in taxes. And as mentioned, President Obama has offered a very attractive solution the problem (relatively speaking - because any fiscal contraction is never popular, of course). You cannot sweep economic problems under the carpet. But there sure are people in the US government who (apparently) think so. Watching some politicians talk fiscal policy (and monetary policy, for that matter) on TV is a bit like reading some of the posts on tinnitus on this forum: neither of them have any clue what they are talking about!

Do you not think that lowering spending and trying to grow the GDP would work.

Well in economic theory that is "kind of" a contradictory statement. If you lower government spending, you cannot increase GDP at the same time (because you lower "demand" with a spending cut). Of course you can try to increase consumption instead (but a government has no direct influence over consumption because that this regulated by the consumer market). The consumer market can be influenced indirectly by fiscal policy (e.g. lower taxes give people more money to buy goods for, but increases the budget deficit also) and/or monetary policy.

attheedgeofscience
27/APR/2015.