So partly because of our demographics and partly because of tax cuts and expensive wars we have seen deficits and the National Debt grow significantly since the last Clinton administration.
The demographics of that period are not going to repeat themselves in the near future and any significant tax increases are unlikely, so what is the solution.
Of course one potential answer will be to inflate our way out of it. If we allow inflation to increase the value of the debt will decrease proportionately. Now of course that will lead to rising interest rates and cause issue for a certain percentage of the population but would have the effect of making payback more affordable since it would be in cheaper dollars.
However, inflation is not something that is likely to be pursued as a deliberate policy outside of the nominal inflation rate the Fed considers healthy. It may happen anyway since if the world decides the US can't fulfill its obligations and weakens our dollars. If we don't do something about the debt at some point this could be a real possibility but not in the immediate future.
One potential way of dealing with the debt is simply to accept it and try to keep it to some percent of the GDP. Similar to individual credit scores that consider amount of debt versus income to determine credit worthiness, there could be a consious effort to simply cap the debt at a certain percentage.
This is a way to manage the debt and realistically it is unlikely that the country will ever actually eliminate the debt but of course the risk here is the same. The discipline required to stay within the limits is difficult, but even worse are increases already baked into our economy.
Social Security and Medicare are going to increase as the Baby Boomer generation retires and without a counterbalanceing population increase of productive workers it will impact us for the next 20-50 years.
Interestingly, the improvements in medical technology that help people live longer are pretty harmful to the debt as we see older indiviual use health care and receive benefits longer than previously anticipated.
Ultimately the debt problem has to be dealt with via annual budgets, since the debt rises or falls based on the surplus or deficit in that budget. We did have surpluses but instead of using them to pay down the debt when we had a chance we decided to reduce taxes and return that money to the public.
That falls into the next way to deal with the debt, increae the economy which will increae the tax base and create tax surpluses. This is sometimes called supply side economics although you could also approach it from the demand side. Generally a reduction in cost, such as reduced taxes will lead to reduced prices which will increase demand. As demand increases efficiencies of scale lead to further price reductions leading to more demand and so on.
The model works in an academic scenario but has certain issues in real life. For example, there is a dimishing demand as markets get saturated. One everybody has a usable car, they don't keep buying them. So it really requires there to be pent up demand that can be freed by lower prices. Increase supply without increased demand lead to deflation, which has its own issues.
Also, we have sources that can fill the demand that are not domestic. So the increase activity is potentially not benefitting our tax base. It could be argued, although I don't have enough data to show it that the tax cuts of the early 2000s benefitted China much more than us. Trade deals are a piece of that but we now see that many of our companies have become multinational and keep offshoure profits to avoid taxes.
(to be continued)
No comments:
Post a Comment