Daniel Altman III: If you were to wind the clock back to the eve of George W. Bush’s election as President in this country, you would say, “How the heck did we get to a situation today where we owe so much money and our debt just seems to be increasing?” Back then if you looked at the 10-year projections by the Congressional Budget Office, we were supposed to have $5.6 trillion in surpluses. And now we’re faced with these multi-hundred billion dollar deficits stretching year after year into the future. How did it happen?
Well, a lot of things happened. We cut taxes by a tremendous amount just at the time when people were starting to expect more and more out of their government. We also faced this long-term liability from Medicare and Social Security and we haven’t been very good about trying to rein in that liability. And we’ve had our wars, which have cost hundreds of billions of dollars a year. On top of that, of course, the recession; this recent downturn where we’ve had to plug a lot of stimulus into the economy.
The good news is, even with all this debt, we still have a lot less than many other countries proportional to our GDP. It’s not an unreasonable amount. Even though Standard and Poor lowered the debt rating for the United States, we still have no trouble at all raising money on international credit markets; in fact, the interest rates that our Treasury has to pay are some of the lowest in history.
So what can we do in a responsible way to stimulate our economy, get out of this recession? Well, usually we have two choices, government spending and tax cuts. Government spending, economists will tell you, is usually more powerful because that goes straight into the economy. Tax cuts can be saved by some people. In fact, except for working people who are living sort of hand-to-mouth, most people will save the large part of the tax cut.
So when we think about spending, what’s the best way to spend? The best way to spend is in the way that stimulates our economy in the short term, but also helps us to grow in the long term, and that means spending on things like infrastructure and education and basic research. Our creditors will lend us money to pay for these things because they know that it helps our ability to grow. And that’s going to make us even more able to pay those debts back in the long term.