– Taxes and Spending

After the economic collapse of 2008 and the subsequent Great Recession, government budgets in the US faced a big squeeze.  This was a crisis in the short term, because many state and local governments were suddenly unable to pay for everything that they had promised their constituents – either taxes had to go up, services had to be cut, or some combination of both.  In most cases, they couldn’t borrow enough to cover their short-term needs, so there were immediate negative consequences.

The federal government, however, has the option of borrowing to finance its budget deficits, which has allowed it to run a considerably looser fiscal policy than any state or city could imagine; this has resulted in a highly unsustainable budgetary policy.  The government has promised too much in transfer payments, and isn’t bringing in enough money in via taxes.  Eventually, if current trends (demographic, political, and economic) continue and we fail to reform or refinance Social Security and Medicare, the Federal government’s debts will become too great and some form of default will become necessary.  This would be a catastrophe for both the US and the global economy, and is the nominal reason why the Republicans in Congress have become so militantly opposed to government spending (the actual reasons seem to be much more philosophical than economic, but this gives them a good excuse for their opposition to spending).

This lack of sustainability and the potential for an eventual fiscal catastrophe are long-term problems; we can continue as we are for another twenty years or more, piling up more debt, without triggering economic disaster.  Unfortunately, dealing with the problem at the last minute would be almost as painful as defaulting (as Greece and the Eurozone have learned), so the need to solve the problem by putting the country on a more sustainable path is much more immediate.

 

Part 1:  The obstacles to sustainability

Part 2:  Untangling the knot

Part 3:  Interactions – Taxes & Spending

 

Further reading in Taxes & Spending

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