OK, let's see if I've got this straight. Both Republicans and Democrats created a fiscal cliff and budget sequestration to force themselves to reduce the budget deficit and debt. The main disagreement is whether we should cut entitlement spending (i.e., Medicare, Social Security and Medicaid) or raise taxes on those making $250,000 or more. The entire economy is being held hostage while our elected officials duke it out.
Without a resolution, our battle-scarred economy will be thrown right back into recession. The 12.3 million unemployed will have an even worse time trying to find a job, and the weak housing market will be KO'd back onto the canvas. Is this really the right time to be worrying about the debt? No, for two reasons.First, the timing is wrong, wrong, wrong. We are barely in the expansion phase of the business cycle. The economy needs just a little bit of a boost to get it back to the 3-4% growth needed to create enough jobs to reabsorb the unemployed. Business leaders and shoppers need the confidence inspired by strong political leaders, to really get the economic flywheel whirring again.
Second, there is no debt crisis! The U.S. government can easily pay all the owners of Treasury bills, bonds and notes with more credit. Unlike Greece and Spain, we can easily print all the dollars we need to make good on our debt. Yes, $16 trillion is such a large number that it boggles the mind. On the other hand, that's also how large the U.S. economy output is. If growth picks up to 3-4%, then the debt-to-GDP ratio will shrink back below 100%.
Then, and only then, should the government think about cutting back on spending, and/or raising taxes. When the business cycle is in the expansion phase, then it needs to be cooled off by these contractionary fiscal policies to avoid another bubble. That's how it's supposed to be done.
What It Means to You
Don't let all these political scare tactics about the debt "crisis" bother you. The U.S. is not in a debt crisis like Europe. Our economy is perfectly capable of pulling us out of debt. Look at this table I just put together on the National Debt by Year. I keep hearing how the $296 billion debt from World War II has never been paid off. Yes, that's the last time our debt-to-GDP ratio was more than 100%. But we grew out of it. The U.S. GDP was only $223 billion then.
What's going on in Washington right now is a power struggle to determine who has more political clout. The argument over tax increases vs entitlement cuts is a political one, not an economic one. The economic recovery is doing pretty well...despite everything those in Washington are doing to stop it.