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A National Addiction to Deficit Spending

If you can afford a lobbyist and make campaign contributions, you can be immune from the tax collector and be assured your special interests receive federal funding. So how will this pattern of leadership affect Americans? Some warn that the dollar might fall even more sharply in value.

We rank among the largest debtor nations in the world.  We have the highest federal budget deficit, and Americans are struggling under the highest personal debt they have ever experienced.  The standard of living for most Americans is spiraling downward.  American families have and continue to fall out of the middle-class in record numbers.  The combination of lost jobs and millions of foreclosures mean a lot of Americans are homeless and hungry for the first times in their lives.

The government considers a family of four earning less than $22,000 per year to be impoverished.  Approximately 25 percent of all American children are in this group, the largest group of children to be raised in poverty since the Great Depression.  This generation is being shaped by homelessness and hunger.  For these families, the prospects don’t look good. In 2010, there were one million foreclosures; another million foreclosures are projected this year.

Unlike our government, Americans are tightening their belts as a result of an economy that has been mismanaged for decades.  In March, the government spent over eight times its monthly revenue. The federal government netted $128.2 billion in tax revenue and paid a net of $1.1 trillion in federal expenses.  About $705 billion of federal spending went to redeem matured Treasury securities.  In order to pay a debt that exceeded revenue, the Treasury did what it does best – it borrowed by selling $786.5 billion in new securities.  March was not an anomaly; for the first six months of fiscal 2011, the budget deficit grew by 15.7 percent.

Democrats and Republicans are both responsible for driving the national debt into the stratosphere.  President Bush did his part, and President Obama has followed.  According to the Congressional Budget Office, the Obama booster rocket pushed the deficit from $455 billion in 2008 to a projected $1.6 trillion for 2011.

Raising taxes in a fragile United States economy is not a good idea, nor is it popular with voters, especially those aligned with special interests.  Earning more revenue through international trade is not in our future, as the Clinton, Bush and Obama administrations and Congress opted to create a trade deficit of monumental proportions.  Even if we made a real effort to increase our exports and decrease imports, it would take decades to rebuild our industrial base.

So how has this leadership affected most Americans?  During 1990 – 2000, real median household income increased on average .98 percent per year.  During the pre-recession period of 2000 – 2007, real median household income increased on average only .06 percent per year.

This decrease in the rate of growth occurred at the same time we experienced an approximate 3.1 percent average annual increase in cost of living.

There is no evidence that real median household income will increase or the cost of living will decrease in the near future.  Therefore, our ability to maintain our standard of living will continue to diminish.

Former Federal Reserve Chairman Alan Greenspan says, “Our budget position will substantially worsen in coming years unless major deficit-reducing actions are taken.”  The International Monetary Fund states that the U.S. lacks a “credible strategy” to stabilize its mounting debt and that if the trend continues it will have important consequences for the rest of the world.

One example of our lack of credible strategy is the recent deal between Congress and the White House to cut $38 billion from the budget. This was accomplished using Washington smoke and mirrors.  Much of the money was left over from previous years and from programs Obama planned to cut anyway.  The bottom line is that most of these cuts were one-time cuts that will have little or no impact on reducing the deficit.  Congressional Budget Office estimates show that in non-war outlays, just $352 million will actually be cut.

Since Congress can’t cut costs, we remain dependent on foreign investors to buy our Treasuries.  If that doesn’t work, we risk inflation by printing more money.  We entered the twenty-first century with the world’s most powerful economy, and yet today the future viability of our economy is dependent on foreign investors.

Warren Buffet, former Federal Reserve Chairman Paul Volcker and Nobel Laureate Paul A. Samuelson have warned that one day the dollar might begin falling in value more sharply than it already has.  This, they believe, will occur as foreigners increase their diversification into other currencies and begin cashing in their holdings of United States stocks, bonds and Treasuries.  This would send United States stock prices plunging and interest rates surging more than occurred during the 2008 financial meltdown.

By continuing to buy Treasuries, China can keep the dollar strong compared with the Yuan, thereby keeping Chinese exports cheap relative to United States exports.  The fear of foreign investors is that, as the United States runs up its debt, the risk of defaulting on its obligations through inflation or currency devaluation increases.  To dump the dollar would intensify its decline and thereby adversely affect their investment.  A safer method is to slowly wean off the dollar as a reserve currency.

The rising emerging-market powers of China, India, Russia, Brazil and South Africa (BRICS) are pressing for a global monetary system with less reliance on the dollar. The BRICS oppose the financial and political power that America benefits from by having the leading reserve currency when our economy is such a disaster.  They are worried that America’s huge trade and budget deficits will debase the dollar and global economy.

These countries will focus increasingly on their own markets and will be less prone to help finance our faltering economy.  By running a huge current account deficit, Washington has left the dollar and the American economy vulnerable.

Are we delusional to believe that this time “the government has to do something?”  There is no free lunch – every special interest with a lobbyist is looking to have someone else pay the bill for government.  If you can afford a lobbyist and make campaign contributions, you can be immune from the tax collector and be assured your special interests receive federal funding.

During the mid-term election, $4 billion was spent on campaigns.  If every one of the 90 million people who voted donated $25 (a lofty assumption) to their candidate, this would account for $2.2 billion.  Where does the remainder of the money come from and at what cost?

Three decades of disjointed trade agreements have had a severely detrimental effect on our ability to generate jobs.  Without the tax revenue produced from these jobs, the economy will not improve on its own. The result is that today we have 13.5 million Americans out of work, which many believe is grossly underestimated. Horribly, 25 percent of our children now live in poverty, and this percentage is rapidly growing.

At what point will the American people finally realize that “the government does not intend do anything?”

About ronald r. pollina

Geoeconomist Ronald R. Pollina, president and founder of Chicago-based Pollina Corporate Real Estate, is the author of Pollina Corporate Top 10 Pro-Business States Study, which is published annually, and Selling Out a Superpower: Where the U.S. Economy Went Wrong and How We Can Turn It Around (Prometheus Books).