Lisa Simpson
Feb 13,2010
In: Finance

Will America Have to Live on with the Deficit?

The Obama government inherited from the previous Bush period a handsome deficit of more than $1 trillion.

The Obama government inherited from the previous Bush period a handsome deficit of more than $1 trillion. Bush had been living with deficit budgets for the past consecutive seven years. Economic rules prescribe that during times of crisis the deficit should not be curtailed but rather the government should spend more to bring back the system to its moorings. The recent budget presented by Obama shows a staggering deficit of $1.3 trillion. But does this mean that America will have to live on with deficits?

The problem has to be solved. Repeated deficits are harmful not only to the economy but to the security of the country in the long term. If the government has to continuously borrow to fill up the difference it would push up interest rates and force the private sector to compete with government to get investors. This in its turn would bring down economic growth and thus the earnings and standard of living of all.

It would happen slowly. When the creditors lose their confidence about the government putting its monetary matters in order, they could suddenly turn away and invest their money somewhere else. This would trigger off a financial crisis with heavy increases rates of interest causing the currency to depreciate sharply.

Looking at the present scenario there is no doubt that over next many decades the deficits as well as the debts of USA will be dangerously high. But those who are crying foul over the deficit issue today – the fear-mongers – are failing to note that the impact of the stimulus is negligible on the long term prospects because the spending is only for a short while. The pivotal question and the danger is the if deficits pile up over a long period and if the prevailing trends, especially in health care, continues the situation will be volatile.

To tackle this the Obama team is putting into cold storage some non-security spending for the next three years and allowing the Bush regime introduced tax cuts to cease as per schedule by the end of 2010.

To seriously tame the problem of deficits would require the giving of serious attention to health care problems and restructuring Social Security. Sans these the economy has little chance of recovering.

Many plans have been put forward as remedies but the problem is not with the blue print of these plans but the lack of political will to execute these.