By Brendan Fitzgerald, CPA
2012-2013 Chair of the Executive Board
Congratulations! We survived the end of the Mayan calendar on Dec. 21. It was entertaining, but few were really preparing for rapture. Amid the speculation that the end was near, we were treated to a 24-hour-a-day news frenzy on the fiscal cliff debate. But the greater threat continues to be the mounting federal debt, which has been increasing steadily by the annual deficits. We are sacrificing the long-term economic well-being of our nation through fiscal and monetary policies that are not sustainable.
The public debt is over $16 trillion and rising. In the coming months, we will be treated to yet another frustrating round of political gamesmanship as the battle over raising the debt ceiling is debated in Congress. The president has vowed that he will not negotiate with Congress over raising the debt ceiling, publicly stating that Congress must provide the funds to pay for the bills they incurred.
Some pundits have mistakenly used the analogy that the debt ceiling is similar to the credit limit set on a credit card, and therefore cannot be exceeded. That’s not the case. It more akin to a business reaching the maximum borrowing limit on its line of credit, and still adding to its trade accounts payable. Debt continues to be incurred as long as the expenditures are greater than the cash receipts. Add to the public debt the amount the government has borrowed from social security that must one day be repaid and we are facing an economic disaster.
Some contend that we need not worry about the government paying off its debts because it has the power to levy taxes, or simply print more of the dollars we have promised. In the short run, we can solve our problems with monetary policy to provide liquidity in the economy until the unemployed can become employed; or use fiscal policy, such as increased taxes for high income taxpayers; or focus on lower discretionary spending, but not entitlements. What is most concerning is, the threat to our national security and stability is real. What is lacking is a clear plan for addressing the long-term implications of continued deficit spending. “I’d gladly pay you Tuesday for a hamburger today” was a saying made famous by J. Wellington Wimpy in the cartoon Popeye. Wimpy was a soft-spoken, lazy and uncharitable man who unabashedly had his hand out, but when Tuesday came and went, the debt was never repaid. That has a ring of familiarity to it.
As the lender of last resort, the Federal Reserve has stepped in to provide the liquidity to the economy by buying bonds to keep long-term interest rates at historical lows. The rollover of old debt to new debt in the future will undoubtedly cost more when buyers demand a higher rate on their investment because the value of the dollar is undermined. We will have more debt at higher interest rates.
We have to separate ideology from economic sensibility. With the economy on precarious footing, a sudden decrease in government stimulus spending combined with low growth in job creation would undoubtedly send the economy into a downward spiral. We need a reasoned plan we can begin to follow with checkups along the way to make sure we do not stray. Continued deficits adding to an ever increasing total debt will have devastating consequences. Fiscal policies such as tax cuts and spending increases that stimulate growth are normally expected to work in the short run, while tax increases and spending cuts tend to slow the rate of future economic expansion. A restrictive monetary policy will eventually be needed to slow the economy to offset inflationary pressures brought about by current policies. Those of us old enough to remember the 1970’s recall the “perfect storm” of economic bad news: high unemployment, slow economic growth and high inflation.
Our nation’s economic future is more at risk every day we add to the national debt. At $16 trillion dollars and rising, we will one day have to pay the long-term price for short-sighted political posturing. The reality is we must earn our way out of this mess, not borrow our way out. The debt crisis was not created overnight and it will not be resolved quickly or easily. One day it will be Tuesday for our nation and we better be prepared to make good on our promise to pay.