America is currently facing tremendous and mounting budget deficits, and correspondingly large and increasing national debt. However, it gets little attention. Just two weeks ago, two articles were written in this very publication, purporting to scrutinize the economic policies of the candidates, yet both barely scratched the surface of the national debt. Considering this is, in my estimation, the economic issue of our generation, and perhaps the most important issue altogether, I believe it deserves a more thorough treatment.
The federal budget deficit is the amount our government has to borrow each year to make up the difference between what it takes in as taxes and what it spends. This money is borrowed from Americans and individuals and governments abroad. This money will need to be repaid and it is our generation who will pay for the debts of our current administration. When the government runs a deficit, it is borrowing from the future, it is borrowing from us.
The consequences of these deficits are many and far reaching, but consider just a few. The most often cited consequence of debt and deficits is called "crowding out." Basically when the government has to borrow a lot of money, and there is only a certain amount of money out there to be borrowed, the private sector (namely businesses and individuals) is unable to borrow as much. This is a simplification, but one can see the problem. Low investment by businesses means slower accumulation of capital (machines, buildings, computers). Capital is what makes workers productive, and productivity is what raises the standard of living. Slow capital accumulation will leave our generation with obsolete means of production, and consequently, we will have a harder time competing with the rest of the world.
To be fair, low national savings doesn't necessarily imply low investment, but if we do want to invest more, the difference will have to be borrowed from foreign sources. This is another major problem with debt and deficits: our generation will be increasingly indebted to foreign sources. Currently, Treasury bonds are seen as a good investment, and many foreign savers are happy to buy U.S. debt. Continuing fiscal folly may leave other countries doubting the value of U.S. debt. If at some point foreign investors lose faith in U.S. debt, we could face a currency crisis like those seen in Latin America at the end of the 20th century. Even without an Argentina-style meltdown, this increased dependence leads to fiscal insecurity.
There is a final consequence of debt and deficit which will disproportionately affect young people: higher interest rates. When the government borrows, it must offer interest. To finance larger deficits, the government must offer higher interest rates to get more people to lend. Unfortunately, higher interest rates make being in debt expensive, and young Americans, particularly students, are more often in debt. As the government needs to borrow more, interest rates will rise and this will make our student loans, our first cars and our first mortgages more expensive.
Ultimately, the government is just like any of us-if it wants to spend more than it has, it has to borrow. This government, by allowing spending to increase while decreasing taxes, has chosen to borrow a lot. The government is borrowing from you and me, and whether we pay for it in the form of lower productivity, increased instability or increased interest rates, we will most certainly pay.