US Debt Dilemma, No Better Solution?

By Liu Lina and Liu Hong

Xinhua Writers

WASHINGTON, Oct. 17, 2009 (Xinhua) --

The U.S. government is without doubt facing great challenges, among which the debt dilemma is the biggest test.

    The 1.42 trillion dollars federal budget imbalance of the fiscal year ending on Sept. 30 announced Friday is a so-called better-than-expected result. The figure, which tripled last year's record, deserves close attention.

    As a proportion of the economy, the deficit accounts for about 10 percent, the highest it has been since the World War II. Earlier this year, the government had projected the ratio might reach about 12 percent.

    For fiscal year 2009, the government collected 2.1 trillion dollars in revenues, a 16.6 percent drop from 2008, while government spending last year jumped to 3.52 trillion dollars, up 18.2 percent over 2008.

    In its statement Friday, the Treasury Department estimated deficits would total 9.1 trillion dollars over the next decade unless corrective action was taken.

    REASONS BEHIND THE INCREASE

    The Secretary of Treasury Tim Geithner gave two reasons for the skyrocketing federal deficit.

    Firstly, Geithner believed that the deficit was inherited from the George W. Bush administration (i.e. war costs. See below).

    The statement from the department said that "the 2009 deficit was largely the product of the spending and tax policies inherited from the previous administration."

    Second, it was a result of the government's actions to tackle the worst economic recession since the Great Depression of 1930s.

    The Obama Administration has launched a 787-billion-dollar stimulus bill to boost the economy and another 700 billion dollars to stabilize the financial system since President Barack Obama took office at the beginning of the year.

    "This year's deficit is lower than we had projected earlier this year, in part because we are managing to repair the financial system at a lower cost to taxpayers." Geithner said.

    "It was critical that we acted to bring the economy back from the brink earlier this year," White House Budget Director Peter Orszag said in a statement.

    The fact that Americans have been addicted to debt is not news anymore. It dates back to the Ronald Reagan era in 1980s when the president began to think that a deficit budget was not a big deal for the country thanks to the status of the U.S. dollar as the core of global reserve currencies.

    George W. Bush, too, believed deficits mattered little. During his terms of presidency, Bush launched the war against Iraq and reduced taxes twice, changing the federal budget from surplus to severe deficit.

    Now the U.S. government realizes that heavy and heavier debt really matters, thanks to the financial crisis that hit in 2008.

    David Walker, the former Comptroller General of the United States, and now President of the Peter G. Peterson Foundation, said Americans living beyond their means would finally lead to leadership deficit of the world.

    The U.S. federal deficit would be unsustainable if the government did not impose fiscal discipline, said William Gale, senior fellow of the Washington think tank the Brookings Institution.

    "The president recognizes that we need to put the nation back on a fiscally sustainable path," White House Budget Director Peter Orszag said.

    NO BETTER SOLUTION?

    Basically, as the former Treasury Secretary Robert Robin put it, there are only two ways to solve the deficit problem: to increase income on one hand, and cut spending on the other.

    The Obama Administration, at least at this moment, seems unwilling to take serious actions on either.

    Firstly, let's look at the spending side.

    The economic recovery remains nascent and fragile; the unemployment rate is high and still climbing. At 9.8 percent, unemployment is expected to rise to double digits soon and will not fall significantly in the next several years.

    In addition, President Obama has vowed to lay the foundation of prosperity of future generations, which means that he has to implement profound and fundamental reforms to American society.

    The healthcare overhaul is one of the most difficult tasks that the government is pushing now. But critics say that "Obamacare" will only weigh more debt on American taxpayers, at least in the short run.

    Moreover, the two wars in Iraq and Afghanistan have been constantly sucking money from the federal government.

    Then, on the income side, the government faces an even harder choice.

    To raise or not to raise taxes, the president has to make a reasonable decision. Obama had promised during his election campaign that he would not impose higher taxes on middle-class people, who make up the majority of American society. This is sensible, especially when a government or a party is pursuing re-election.

    Therefore, the Obama Administration has been taking a relatively easier way to solve the problem, which can be called the globalized solution.

    Simply speaking, the U.S. government's method is to borrow money from the world and devalue the dollar, the dominant reserve currency of the world currently.

    The U.S. dollar index, a measure of the dollar's strength against a basket of major currencies, is down 14 percent since early March. It touched a 14-month low last week.

    The dollar's sharp drop has led to considerable anxiety about the status of the United States as the dominant force in the global economy, said Zachary Karabell, a U.S. scholar, in an article published Tuesday in the Wall Street Journal.

    What the Obama Administration has promised is that it will tackle the deficit problem when the economy is on a firm footing of growth.

    But economists say the "let the debt grow itself out" solution will not happen in the short term and the recovery remains full of uncertainties. Besides, returning to fiscal discipline since then will be another story.

    Obviously, foreign investors are not ATMs without limit either. No wonder many experts worry that the debt bubble will be a greater crisis some day in the future.

Editor: Mu Xuequan