Understanding The US Debt Crisis

Posted on August 22, 2011 in GlobeScope

By Abhishek Nayyar:

Is United States dropping into a void and how deep is the federal debt going?

From 2001 to 2007 the world economy grew faster than in any other six-year period over the past thirty years. Most developing countries shared in the boom, even including sub-Saharan Africa. In the second half of 2007, the boom turned into, if not bust, then a period of uncertainty and instability. The United States has had a debt ceiling since the First World War, when it first went into the bond market big time. It has raised it from time to time ever since. Is something fundamentally wrong with America?

There were the many pronominal reasons which led US to go to dump of debt crises.

First, America’s economy was at near-recession levels, with slow growth prospects and enormous unemployment. With 9.2 percent of its workforce unemployed, the United States was not as badly off as Spain where joblessness is above 20 percent, or Greece where it is 15 percent. In fact, joblessness in the United States has been very close to or above 9 percent since April 2009, more than two years and counting. This is the longest period of high unemployment since the winter of 1982.With more than 14 million Americans without jobs, and many with little prospect of work in the months to come, it is not surprising that the U.S. economy is hardly growing. Second, America has been fighting two wars in distant places for an incredibly long time – Afghanistan since October 2001 and Iraq since March 2003. The cost of these wars has many estimates, but all begin well above 13 digits – that’s more than a trillion dollars. It’s a burden the country can no longer afford. A decade of enormous spending by the Defense Department has added significantly to the national debt. Third, on the domestic side, spending for entitlements, especially for the giant health insurance programs Medicare and Medicaid has continued to grow at percentage rates that are far above inflation and far above what is sustainable. An aging population and the first waves of retirement by the Baby Boom generation are compounding the rate of growth. The inability of either government or private industry to gain control of health care costs may well be the single most critical factor in the burgeoning national debt. Fourth, the United States is mired in a revenue drought brought on by President George W. Bush and the Republican Congress who engineered two massive income tax cuts, the first in 2001 and the second in 2003. Whatever one’s point of view may be about the justification for these tax cuts, it is indisputable that they have added huge new sums to the nation’s debt and deficit problem.

The Bush tax cuts were extended for two years in December 2010, after considerable debate between the parties, and will expire again in 2013. According to the Congressional Budget Office, this extension alone will add $3.3 trillion to the national debt. That’s as much as all of the spending cuts being discussed this week in Washington as the price of raising the debt ceiling.

Finally, and perhaps most important of all, there is a growing realization here in the United States that as a result of all of the above factors the United States has failed for too long to invest in the country’s infrastructure – both physical and intellectual. As a result, America is losing much of its future competitiveness in the global economy.

Is United States dropping into a void and how deep is the federal debt going? Yes

The fact that it is the first crisis in history where hopes are pinned on growth in developing countries to rescue the world economy, and the first time that troubled banks in the United States and Europe have been rescued by capital injections from developing countries, should jolt the United States and the G7 out of their complacency about their own leadership and about the dominance of market fundamentalism. The crisis may be a stealthy bridge-building event toward incorporating China and several other “emerging market” states as equal partners at the top table of global economic governance, and toward a new approach to the role of political authorities in governing the market.