The federal debt is skyrocketing. Taxpayers, investors, and foreign allies are signaling Washington to reduce its federal deficit. The exploding federal debt threatens our national solvency. According to the Congressional Budget Office (CBO), the 2010 federal budget deficit was 1.3 trillion dollars. The CBO estimates a 1.5 trillion budget shortfall for 2011. 52
Economists worry the rapidly growing federal deficit will slow the pace of economic recovery. According to the Brooking Institute , the deficit "may cause investors and creditors to reallocate funds away from dollar-based investments". In turn, this will lead to lower dollar and higher interest rates. Moreover, the exploding national debt could result in further erosion of household wealth, warns the Brooking Institute.
As a result of the housing crash, American households have already seen a significant reduction in their net worth. This has reduced consumer spending and has resulted in economic slow down and high unemployment. The loss of jobs and the public’s growing dependence on government benefits has forced Washington to borrow in order to balance its books. However, this approach is not sustainable according to the reports from the COB and the Brooking Institute.
One way of reducing the federal deficit is to increase the government’s sources of revenue. This is usually increases in individual or corporate taxes. Another option is to cut spending by eliminating programs and reducing payments on popular entitlements like Social Security and Medicare. Each option carries its own political risk. Democrats are opposed to any cuts in Social Security and Medicare. The Republicans are staunch supporters of tax cuts. The two sides are often far apart and cannot reach a bipartisan solution to lowering federal spending.
Senators Orrin Hatch (R-Utah) and John Cornyn (R-Texas) have introduced a balance budget amendment to the constitution in order to stop the growing federal deficit. The proposed amendment is supported by 19 other Republican senators. The Hatch-Cornyn constitutional amendment seeks, among other things, to mandate "that total budgetary outlays for any fiscal year not exceed total revenues". It further imposes limits on federal spending not to exceed 20 percent of GDP. The amendment requires the President to submit a balance budget and imposes a "two third vote in both the House and Senate on any measure that raises taxes".
There are some who argue cutting government spending during economic crisis is a bad idea. The proponents of deficit spending believe the federal government should step in to fill the gap left by reduced consumer spending. During the great depression, President Franklin Roosevelt used taxpayers’ money to stimulate the US economy.
The genesis of deficit spending is traced to the noted economist John Maynard Keynes. Keynes believed deficit spending was a viable weapon for fighting economic stagnation. But even the most steadfast supporters of Keynesian view understand the need for paying off the debt as soon as the crises are over. All too often when government embarks on a program of deficit spending, the politicians find it difficult or politically unfeasible to scale back programs and end up ignoring the need to quash the debt when good times return.