Behind the US Debt Crisis

Published on Thursday, August 11, 2011

(From the Perspective of a non-Economist)  

Everything gets complicated in the hands of the government. Which reminds me of some of the famous quotes from President Ronald Regan: "Government is not the solution, Government is the problem." And "If someone says I am from the government and I want to help you, run from him as fast as you can." These are incredible statements from a politician. It is worthwhile to remember these quotes when we look for a solution to a problem from the government. Now we are looking for a solution to our debt and economic crisis in the US from our government. President Regan would have said - Good Luck!

The US sovereign debt was ~5.7 trillion dollars when G. W. Bush was sworn in as President on January 20, 2001. He raised debt level to ~10.6 trillion dollars by the end of his term in 2008. In other words, he added ~5 trillion dollars to the debt in 8 years. Obama was sworn in as President in January, 2009, and he increased the debt level to 14.3 trillion dollars by July 30, 2011, meaning he has added ~4 trillion dollars within two and a half years. This is the fastest growth rate of the national debt. The US gross domestic product (GDP) was 14.7 trillion in 2010, now 13.3 trillion dollars, meaning GDP is declining, as nation's debt is growing at an alarming rate. The US debt is now higher than the GDP, which is unprecedented in the history of this country. You may say – President Obama owned a devastating economy. That is correct. It is also correct that his 'Hope & Change' message caught on fire because of the bad economic condition of that time. In other words, bad economy helped him get elected. He was supposed to fix the economy. Voters were hoping that - he will change the direction of the economy. Unfortunately, for the last 3 years, all I have been hearing from President Obama is this – "Don't blame me for the bad economy; I have inherited it from Bush." Do you think a CEO of a major corporation, hired to turn around an ailing company, could have survived with such an argument? I don't think so; do you? 

Recently, President Obama asked congress to raise the debt limit even higher; Congress raised the limit for 2012 to 16.7 trillion dollars. Now, he will be able to borrow more to pay for ever growing government expenses. But, one thing good happened this time around - President won't have a free pass to borrow; there are some constrains for mandatory cut in spending also. Credit for these constrains goes to the conservative Tea-Party members of the Congress. I know every President before him also raised debt ceiling, without constrains, to pay for the runaway federal expenses, but, that was then, when GDP was growing faster than the debt. Now, debt is growing faster than the GDP. So, Obama is out of luck. National debt has surpassed the GDP, which means a major portion of the government revenue will have to be used to pay just the interest on the debt, and significantly less money will be left for other federal expenses, which will increase the debt burden even faster. As you can see, it is a vicious cycle.   

The federal government now needs ~300 billion dollars per month to pay for all expenses, including interest payment on the debt. The tax revenue generates only ~200 billion dollars per month for the treasury. Therefore, government needs to borrow 100 billion dollars a month to pay for all federal obligations. How do you balance the budget without borrowing under this condition? How do you stop runaway debt?


There are 3 ways to put a brake on the runaway debt – 1) increase tax revenue to pay for budget deficit, 2) revive economy to generate more revenue, and 3) cut spending. The first option is not good during an economic downturn. Because, tax revenue comes from everybody's pocket, and more they give to the government treasury, less they have in their pockets to spend, which stifle the economic growth. How about raising taxes on the rich? This is the option Obama and Democrats support. Conservatives, such as Tea-Party folks and Republicans, oppose this plan. Why conservatives oppose raising taxes on the rich any further?

If you analyze the tax-payer data, you will find that - bottom 50% of the population in the country do not pay any federal income taxes, and the top 5% earners pay for 80% of the total tax revenues of the US treasury. Also, more than 50% income of the so called wealthy, earning over 250K per year, goes back to the government treasury in some form of taxes and fees (e.g., Federal, Social Security, Medicare, Medicaid, Local, Consumer, etc., etc.). What these data tell us is that - even though more than 50% income from the so called rich already goes back to the government treasury, yet - government cannot meet its obligations. This fact indicates that - there is a spending problem, not a taxing problem.

Also, the wealthy people are the job providers in the country. If the tax burden on the wealthy is raised even further, the wealthy people could relocate their businesses elsewhere (abroad), taking jobs away with them, or they could pass extra tax burden right back to the general mass through their products and services, or they could reduce work force. When my employer (corporation) faces budgetary constrains – they cut spending, reduce workforce, and enforce mandatory hiring freeze. In all cases, regular folks get affected, which also affects the economy. This is not a very complicated process to understand. Is it? That's why – it is not a good idea to tax the rich beyond certain limit. The rich is already giving back more than 50% of their income to the government treasury. Therefore, they are definitely paying more than their fare share of the revenue.  If the revenue problem still exists, it will be due to runaway government expenditures.


The so called 'Tax the Rich' rhetoric is used by the socialist/liberal political ideologues to mobilize proletarian class in the society against the rich to induce class warfare. It may work, politically, during an economic downturn, but it will be quite detrimental to the ailing economy. The Government spending mostly benefits bureaucratic machines and non-productive service sectors; very little of it reaches the productive sectors, where it is needed the most. The case in point is the recent stimulus spending by the Obama Administration, which was ~800 billion dollars. The economy is still in a life-support. Obama administration cannot even account for or track where the stimulus money has gone and what it has produced so far. But, one thing we know for sure – the stimulus spending has increased nation's debt, as it was all funded by the borrowed money. I think - the reduction of federal tax withholding from the payroll was a pretty good idea from the Obama Administration, which may have helped the economy. Unfortunately, it was not enough to invigorate the ailing economy. The other way is by reducing overall tax brackets, to put extra money directly in people's pockets to spend.

The bottom line is - it is hard for an administration, which espouses the principle of wealth redistribution from the rich to the poor (the Robin Hood/Socialist ideology), to implement the right solutions to the debt crisis. The so called wealth redistribution ideology – is like killing the goose for the golden eggs. If you stifle the growth of wealth-producer (rich) to benefit the poor, sooner or later, the wealth will deplete slowly and you will not be able to meet the demand of the ever increasing poor beneficiaries. Socialist system cannot sustain growth of wealth, it can only distribute it. That's why socialist system crumbled around the world. Many of the wealth redistribution vehicles in the US system (Social Welfare, Social Security, Medicare, Medicaid, etc., etc.) are about to crumble also. They are at the brink of bankruptcy. In fact, the Social Security System uses the very same scheme that Madoff used to defraud his innocent victims/investors. In this scheme, the current obligations are met out of the fund generated by the current contributors (investors). This system dries up when the current obligations supersede the current contributions. This condition reaches critical point during a prolonged economic downturn. Fighting poverty with government handouts is never a good idea. If that was feasible, the socialist economy would have flourished, instead of being abolished from the world. The poverty can be fought only by promoting entrepreneurial spirits, increasing job prospects, and sustaining the economic prosperity. There is no other way.

Spending cuts require sacrifices and control. That's never easy. It's like a rehab for a drug addict. It needs discipline. Once we get used to something, it is extremely difficult to give up. But, what's the alternative? If we don't, we may lose everything. Therefore, sooner we go through the whole detoxification process to curve our appetite for spending, the better off we will be in the future. The process needs to be started somewhere. I think, republicans have started the process already; good for them! If we kick the can down the road any further, the country will be bankrupt, just like Greece, Portugal, and Iceland. The US credit rating is now down to AA+ from AAA for the first time in the history of this country. President Obama is probably out of luck - if he does not make an 180o turn off his liberal trajectory.  

The best way to avoid severe cuts in spending is by raising the revenue through economic prosperity, not by taxing the rich. As economy grows, so grows the tax revenue in the government treasury. It makes sense; isn't it? But, what you do when the solution goes against your political principle? This is exactly the situation of the Obama Administration now. Is he going to fight his ideology, and do the right thing for the sake of his presidency and the country? Only time will tell.



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