A greater threat to National Security

Debt is the single biggest threat to our national security’,
proclaimed the then chairman of the Joint Chief of Staff, Michael
Mullen in 2011. The US deficit has since risen to $16 trillion. It is
expected to rise further. This prediction assumes growth will continue
to be minimal and that the government will not amend its fiscal
policies.

Critics of austerity contend that the budget deficit is manageable in
the long-run. They recommend borrowing during the downturn, and
dealing with the debts during a boom. There is no need to decrease
government spending or raise taxation receipts. The latter will rise
as the economy prospers and more Americans get jobs.

Conversely, as Europe returns to recession and the Asian Tigers start
to stagnate, economists should not be to hasty to anticipate recovery.
The Great Recession may well be in an intermediary stage. Would
decreasing government spending further damage the economy? Most likely
in the short-run. Unemployment rates would increase with consequences
for aggregate demand. People would have lower disposable income and
consume less. However, these effects may not outweigh the costs of
further borrowing.

Mullen’s statement reflects upon a starker side to the economy. He
questions whether the current debt is even sustainable. Credit rating
agency, Standard & Poor (S&P) did not think so. Their downgrade of the
US credit rating from AAA to AA+ emphasises the instability of the
current economic approach. Lower credit ratings encourage lenders to
demand a higher interest rate. One could highlight how other rating
agencies left the US credit rating unchanged. S&P would not have
pursued this course, which led the leading manager to ambiguously
retire, unless there were genuine concerns regarding US debt.

But what are the costs of borrowing? In addition to imposing a $51,000
debt on each individual, hindering future governments and generations,
there are the interest payments. If readers were dismayed by annual UK
deficit interest payments of over £40 billion, they will be staggered
by the yearly US’ $430 billion in payments. One mourns the lost
opportunities that such money could have funded. Naturally, it suits
governments to borrow and spend. They reap the electoral rewards, and
leave the expenses for future governments. The record left by the
Blair/Brown government is testimony to this fact. Indeed, borrowing
money during the Golden Age until 2008 meant that deficits were
already considerable before the recession, a time when the country
most required credit.

Nevertheless, many politicians remain under the impression that the
merits of debt exceed the costs. Obama employs similar justifications
to explain the continuance of government borrowing. This process has
sustained the public sector in the US. But for how much longer will
rival economies lend the US money, and at what price for a nation that
once independent.