US Debt Crisis

It is generally accepted that nations can have a certain amount of debt in their books. Especially if their economy is growing steadily. What should be the percentage of this debt compared to the size of the national economy (GDP) is a matter of debate.

This sovereign debt is useful, in that it offers a lot of old people an excellent investment possibility. Especially if the debt is from a top-notch country, whose economy is stable, whose paying power is steady, and is rated well by the rating agency. The US was one such. Pension funds normally subscribe to such debt. Countries with excess foreign exchange will subscribe to this. Right from China, Japan, India, Russia and Brazil hold the US treasury bills.

However, US economy has been going downhill. US govt. deficits have been increasing drastically. There are several infographics explaining the crisis very well. This Washington Post graphics shows that for the current year, the revenue deficit for the US govt. will be nearly 33%! That is, for every $3 the government spends, it has to borrow $1 from others. One can look through the spending and see that a big chunk of the spending is in Social Security, Medicare and Medicaid (amounting to roughly 50% of the total spending), another major spending of nearly $900 billion on defense and an interest repayment of around $251 billion.

This level of borrowing is unsustainable. Their existing debt by the end of 2011 will be $15.5 trillion. It is also expected that over the next 10 years, they will have to borrow a further $6.7 trillion. That is, by 2020 (or 2021), the US national debt will be around $22 trillion.

This is a nation, whose financial health is extremely weak. All indications are that it is not going to be fixed even in the coming decade. US debt is likely to become costlier; that is nations that are lending money to the US will start charging more interest, making the interest repayment costs very high.

What could be the alternate solution? Drastic budget cuts (which will sound very republican, but that is the only solution) including in defense (which the republicans don't like), increase in tax rates for the corporates (very democrat-ic) and enforced compliance, more spending in own healthcare infrastructure like Britain rather than the spiralling cost of Medicare/Medicaid etc.

American system of Social Security is too complex. It is not easy to completely dismantly that. These are people who have paid taxes over the last few decades and it is not fair on the part of the government to simply cheat them out of their entitlements. But the government has to work out some deals to ensure that future Social Security payments are not too high; which would also mean that they should probably start charging less Social Security taxes now. Which would mean, they will have to find some other way of increasing revenue, which would mean increasing income taxes. But that may not be sufficient.

Therefore, the federal government should consider imposing a federal sales tax across the country, over and above any state sales tax. Even a marginal 2% across the board sales tax (from cigarettes to liqour, consumer goods to heavy machinery, gasoline to food) will result in substantial earnings for the federal government. It is not clear to me whether there is any constitutional provision that will make it impossible for the federal government from charging such a tax. If so, it is the job of the legislators to amend the constitution appropriately. I can't see any other way out.