Washington Week: Student Voices (O)

Column: America now faces consequences of irresponsible deficit spending
By Brandon McVey
Daily O'Collegian, Oklahoma State U.
September 22, 2008

$700 billion — that’s the cost of the Bush administration’s three-page proposal to bail out Wall Street.

For the record, that’s more than the entire cost of the Iraq War thus far, and it makes Bush the greatest deficit spender the United States has ever seen.

To accommodate this spending, the proposal calls for raising the legal national debt limit from $10.6 trillion to $11.3 trillion. The national debt is the sum of all the governments accrued spending deficits, which simply occurs when the federal government spends more than it receives in income (like taxes).

How can the federal government spend what it doesn’t have?

The U.S. Treasury creates debt instruments called treasury securities (bills, notes and bonds), which have maturity dates lasting from a few days to 30 years.

The government sells these securities to individuals, institutional investors, other governments and, in the case of savings accounts for Social Security and Medicare, to itself.

The demand for them is high, especially in turbulent financial times like these.

In theory, treasury securities represent riskless investment opportunities; they are backed by the full taxing authority of the U.S. government.

U.S. taxes are the world’s most substantial, secure and consistent cash flows. Moreover, if ever the government is at risk to default on these liabilities, it can simply raise taxes to cover them.

There has been much press about one major investor in treasury securities, namely the People’s Republic of China.

A little more than 25 percent of the $9.6 trillion national debt is held by foreign governments, and of that number, China holds $518.7 billion, according to the Department of Treasury.

Of the major foreign holders of U.S. debt, it is actually Japan with $593.4 billion who holds the most.

China is a major partner in financing the federal government’s national debt, but they are also a major trading partner. The United States has a trade deficit with China, but this deficit is not something for which the U.S. taxpayer is responsible.

A trade deficit merely represents the fact that there are more imports than exports. It should not be conflated with the U.S. budget deficit.

Even in times of budget surplus, the U.S. Treasury releases securities to help with day-to-day financing of operations.

However, the creation of future liabilities passes the buck to future generations and future administrations. Eventually, every security will come due, and the amount of government money set aside to pay interest on and to retire this debt is taking a larger and larger chunk out of the federal budget every year. If taxes are not raised to compensate for more demands on the U.S. budget, then either there will be less available for government programs or there will be ever more deficit spending. The current administration has made the latter their philosophy. Obviously, the question becomes: is this sustainable?

Logic dictates that there must come a point when the money demanded exceeds the government’s ability to tax effectively.

Unfortunately, there is very little sustainable logic in today’s government. This $700 billion bailout ensures short-term stability, but if not paired with long-term responses, future generations are doomed to continue to have the same problems.

In concrete terms, the subprime mortgage crisis has been fueled by a series of presidents and Congresses who have enthusiastically supported the “American” dream of homeownership, sometimes through legislation. While it would be difficult for elected officials to say they do not believe in this “American” fantasy, the fact is that not all Americans need to live in a house to be successful or have a high quality of life. No other nation in the world has so fully deluded itself into this fantasy as America, and as of late, we’ve come to understand the costs of this delusion.

This issue now is whether Generation Y understands this failure. Will we rewrite the American dream in order to pursue sustainability, or will we see another devastating bubble in 20 years?

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