The deficit will be a central issue in the midterm elections next month. Understandably, Republicans are running on their age-old platform of fiscal responsibility. This is appealing to many Americans worried about the United States' nearly $1.3 trillion federal deficit and $13.6 trillion national debt. Will Republicans actually commit to cutting the budget? Given their track record of defensive spending and aversion to raising taxes, Republicans likely will do a better job than the Democrats have in the last two years, but not much better.
The United States must decrease its debt, and it cannot forever spend and consume on credit. Like the nation, many Americans are riddled with debt and credit problems. When people run high debt and fail to make payments, their credit score drops and interest rates soar through the roof. Government financing, though vastly different from personal finance, follows similar principles. If countries and institutions that buy U.S. debt see our nation acting in fiscally irresponsible ways, they will increase interest rates or stop lending altogether. Earlier this year China, America's largest creditor, hinted that it might stop buying U.S. debt and even start selling U.S. treasuries. Such actions could create inflation and devalue the dollar. The dollar, fortunately, is the world's reserve currency, which gives America more of a safeguard than most other countries to maintain its credit. The safety net, however, is disappearing; the euro, yen and eventually yuan might compete to replace the dollar as the world's currency of choice.
Some economists who attended a conference organized by Campaign for America's Future have created fantastical stories. Henri Guaino, for example, suggested that the United States ought to jettison the conventional idea of cutting spending and raising taxes in favor of reducing the debt by inflation. This is storytelling at its best. Although economic growth is necessary to decrease national debt, the revenue generated will likely be spent on funding new legislation unless there is a strong, long-term commitment to cut spending. The most optimistic outcome is only growth that matches the spending rate. The argument that the government can inflate its way out of debt is also ridiculous. First, it would be a political disaster because retirement funds, personal savings and investments would all lose value. Foreign holders of U.S. treasuries would not be thrilled either. Trust in U.S. fiscal responsibility would collapse, causing interest rates to soar and will make it harder for the country to borrow money in times of fiscal distress.
Consequently, that leaves government officials with the difficult task of simultaneously cutting spending while raising revenue. One of the Republicans' biggest problems is their resistance to cutting defense spending, which accounts for 23 percent of the budget and 46.6 percent of the world's total military spending. It is important for the United States to maintain its military dominance in the world, but that does not mean military spending cannot be reduced from its current 4.2 percent of the nation's gross domestic product. One thing that can be cut is the Expeditionary Fighting Vehicle program, a $13.2 billion project to create vehicles for amphibious invasions. The military has not employed contested amphibious landings since 1950. Republicans can reduce funding for such projects without diminishing American's military dominance. The U.S. military budget is massive, and while the country should spend to maintain its military dominance, investment and global involvement need to be reduced.
Republicans also need to raise taxes. Although it may risk prolonging the recession, the Bush-era tax cuts must be removed because the budget cannot be reduced without increasing taxes. Economic policy writers such as Megan McArdle think taxes are on the left side of the Laffer Curve - the infamous graph demonstrating that beyond a certain tax rate, revenues decline as rates increase. The top of the Laffer Curve is the point where an increase in taxation will cause revenues to start diminishing as people respond to incentives. If the country is currently on the left side of the chart, it means the government can increase taxes on the middle class and rich to increase revenue, unlike during the Reagan years when lowering the higher-level income tax brackets actually increased revenue. Now, this does not mean that Obama's proposal to end the tax cut for the "richest Americans" is the policy Republicans should be embracing. According to The Atlantic, Obama's proposed tax cuts for the middle class cost three times more than tax cuts on the "wealthiest Americans." All taxes need to increase when the economy shows promise of renewal. There is something to be said for decreasing government by "starving the beast," but recently it appears that the government spends money regardless of whether it is "starved." Republicans' best course of action is to make a binding commitment to freeze and cut spending, then raise taxes to reduce the deficit.
Cutting the deficit is a necessity. America desperately needs politicians who will place running the nation responsibly in higher regard than managing their own careers. Although I doubt the Republicans are the self-sacrificing public servants needed to bring about real change, I believe they are the party most likely to decrease the national debt. If Republicans can get over their antagonism to defense cuts and tax increases, they will be more likely than the Democrats to reform social security, Medicare, Medicaid and healthcare bill costs. With the support of the electorate, Republicans will hopefully overcome their usual politics and fix federal spending policies.
Nathan Jones is a Viewpoint writer for The Cavalier Daily.
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