Living within your means

Thanks to Southern Beale for her 18th of May post, Americans Live Within Their Means & Other Wingnut Fantasies , which has had me thinking, but there has been an increased sense of urgency about this topic as the U.S. Economy grows closer to a possible default.  While the US is one of the largest economies in the world, it is the only one where this type of budget kerfuffle could happen.  Reduction of the Budget deficit will effect every American’s standard of living, yet people are being lulled into a bizarre sense of denial of where the current course of event will take them.

SoBeale is also annoyed by the Right Wing chant that goes along the lines of  “American families have to live within a budget, and so should the federal government”.   As SoBeale points out, this just ain’t true since the American consumer debt, which doesn’t include mortgages, is $2.43 trillion as of March 2011. Total U.S. revolving debt, which is almost entirely credit card debt, was $796.1 billion, as of March 2011. In fact, in March U.S. credit card debt increased for the second time since 2008, which the Wall Street Journal presented as a good thing:

U.S. consumers in March increased their credit-card debt for the second time since the financial crisis flared, giving a sign of hope that consumer spending could boost an economic recovery that has lost some steam.

In its monthly report Friday on borrowing, the Federal Reserve also said overall consumer credit outstanding rose, up $6.02 billion to $2.426 trillion. The increase, the sixth in a row, was bigger than expected. Economists surveyed by Dow Jones Newswires had forecast a $4.8-billion rise in consumer debt during March.

SoBeale mentions that  Jared Bernstein, who  was Chief Economist and Economic Adviser to Vice President Joe Biden and a member of President Obama’s economic team before leaving the White House to become a senior fellow at the Center on Budget and Policy Priorities writes that the  family budget analogy gets misused.

Graphic shows federal debt held by public as percentage of GDP

Anyway, the US is heading towards the Debt Ceiling showdown, which is a magnificent big of US political theatrics from a nation where political theatrics has become a nasty part of the social system.  Governments run debts when the revenues do not pay for the required governmental functions.  Economists debate the level of debt relative to GDP that signals a “red line” or dangerous level, or if any such level exists. In January 2010, Economists Kenneth Rogoff and Carmen Reinhart stated that 90% of GDP might be an indicative danger level.   Of course, the Budget “mess” is real more about spending priorities than any real crisis.  In particular, the spending on “entitlement programmes”.  The Pew Research Centre found that:

For the public, reducing the deficit is a much lower priority than preserving the benefits provided by Social Security and Medicare: In mid-June, 60% said it was more important to keep these benefits as they are, while just 32% said it was more important to reduce the deficit. Less affluent Republicans view preserving entitlements as more important, while Republicans with higher incomes prioritize deficit reduction. Democrats across income categories say it is more important to keep benefits as they are.

Of course, the usual right wing trick is to mention the word “Taxes” which causes a disgust in the average American’s mind.  This is despite the fact that the US system of taxation is one of the world’s most regressive systems.  The “Bush Tax Cuts” basically only helped the wealthy, yet they were not accompanied by budget cuts to offset the cuts in revenue, but that’s another issue altogether.

The problem is that the National Debt is not the problem as the graph showing how much of that debt is held by private entitites above points out.  There are certain words that cause people to have bad reactions, such as taxes and debt, especially if they are not aware what these really entail to the average person.  The real threat is a default on the National Debt, which is something that the founders didn’t allow.

The United States has had public debt since its inception. Debts incurred during the American Revolutionary War and under the Articles of Confederation led to the first yearly reported value of the National debt as $75,463,476.52 on January 1, 1791. The US had the option of honouring this debt or defaulting and chose the path of honouring it. The founders knew full well if they failed to honour the government’s debt obligations that it would impact the national economy. Unfortunately, those who wish to claim legitimacy by incorrectly following the founders’ “ideals” are more than willing to choose the opposite course of action.

Ultimately, is this all theatrics? Section 4 of the 14th Amendment to the US Constitution states:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

Could that offer a way out of the current budget mess? Or is the US looking at creating one of the worst economic disasters through its ignorance?

Time will only tell if reason will prevail. I have to admit that I am not terribly optimistic about the situation. There are too many people to blame for this happening. I can sound off, but I do not have the power to influence policy, which makes me somewhat blameless. I have done what I can to sound the warning, but like the warnings of climate change, I think they will go unheard.

See:

Center on Budget and Policy Priorities
Policy Basics: Deficits, Debt, and Interest
Economic Downturn and Bush Policies Continue to Drive Large Projected Deficits
Critics Still Wrong on What’s Driving Deficits in Coming Years
How the Right exploits single issues and manipulates religious faith to direct workers into voting for candidates who are a threat to their economic interests.

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