It makes a lot of difference in terms of the operation of the US government. More importantly, it says a lot about the American psyche.
We have an $8.363 trillion debt because the Bush Administration spends money as if therell be no tomorrow. And they have a rather cavalier attitude about all their expenses; they dont want to pay for them. Their constant refrain is, put it on my tab. When the tab comes due, theres not enough money in the US treasury to pay for itremember those tax cuts that Republicans are so fond ofand so the government has to borrow money.
You may ask why dont we just refuse to pay? What if Congress refused to raise the debt limit? Wouldnt that teach bad George a lesson? Perhaps, but it would also mean that the Feds couldnt send checks to Social Security and Medicare recipients, not to mention victims of Hurricane Katrina. Whats worse is that it would send a signal to the world that the US is no longer a credit-worthy client. Interest rates would shoot up, costing the US government, and you and me, a lot more to borrow money.
The other group, represented by people who have their wits about them, folks like Paul Krugman and Robert Reich, argues that a day of reckoning is just around the corner. This has two faces: one actuarial and the other political.
Ill be brief about the actuarial problem. There are these folks called baby boomers who are about to retire. When they do, they will expect services such as Social Security and Medicare; services that already cost us more than $1 trillion each year. The additional service recipients will dramatically increase annual Social Security and Medicare costs and probably our national debt.
It might work indefinitely if we were borrowing from a politically neutral source, like The Bank of Heaven, but we arent. Sixty percent of the debt is privately held; countries like China, Saudi Arabia, and Japan hold one third. There is an increasing danger that our debt holders will wake up one day and declare, You Americans are on a non-stop spending spree. Were not going to pay for it any more.
Of course, they wouldnt cut us off completely. Theyd be like our parents, theyd continue to loan us money, but with stringent conditions attached; like no going out after dark, and much higher interest rates. The problem is that these conditions would affect everything in our economy. Theyd result in a drastic reduction in public services such as education and health care.
The other obvious problem is that we have dicey relationships with some of our creditors, like China and Saudi Arabia. So, if we threatened them militarilyI know thats hard to imagine, but bear with methey might respond by refusing to buy more of our bonds and selling those they have on the open market. This would immediately raise interest rates and, some say, cause runaway inflation. DNC chair Howard Dean recently characterized this problem as a national security failure of the Bush Administration.
The larger problem is that its not just the Bush Administration that likes to party as if there is no tomorrow, its the American people. As a group we spend more than we earn. Americans have a negative personal savings rate; we cover our tabs by taking out home equity loans. This propensity to borrow shows up everywhere in our economy. Last year our imports were 57 percent more than our exports.
So its not just the Bush Administration. Heres the ugly truth: those party animals in the White House are reflective of a national psyche that spends as if there is no day of reckoning. If youre one of those apocalyptic Christians who believe that the rapture is going to occur momentarily, then this may make sense. But, for the rest of us, its a problem.
When the day of reckoning comes then, at the least, were going to have to pay more for everything because all interest rates will jump up. Meanwhile, government services will be dramatically reduced. Well experience Americas morning after that will go on for a painfully long time.
In the meantime, America has to compete with other countries like India and China, and the European Community who have national mottos somewhat different from Lets party and Lets kick some butt with our military. These countries have mottos like Lets have the most advanced manufacturing capability in the world, Lets become the world leader in telecommunications, and Lets have the most skilled work force.
Remember, they can see us on TV. Theyre all watching. Marveling at our collective debt wish. Party on, you crazy gringos.