4 Reasons the National Debt Matters

Several people have made the comment, “The national debt doesn’t matter.” Oh really? Here are 4 reasons they are seriously mistaken.

We Owe, We Owe

You may have heard the line, “I owe, I owe. It’s off to work I go.” Of course this is a take odd on the line in Snow White and the Seven Dwarfs. Regardless, these days it is eerily true for many people. It seems as if fewer and fewer people are working to pay current expenses and save for the future. Instead they are working to pay for past extravagances. It is no different with local, state, of federal government. If government spends more than it collects in taxes and fees, then it must borrow to make up the shortfall. That means that a portion of future tax revenue must be used to service the debt in the form of interest and principle payments. There have been several cities in the U.S. that have files for bankruptcy as a result of this accumulation of debt. What is scarier is that the federal government is doing the same when it comes to spending more than is collected in taxes, in the process accumulating more and more national debt. They even create new debt to pay old debt. There are some serious implications of these practices. If tax revenue is used to service debt, then what is the benefit derived?

Increased Taxes

A common method used to try and close-up this shortfall is to raise taxes. I won’t even get into the argument of whether raising taxes increases or decreases tax revenue. For that you can do some research on the Laffer Curve to understand the impact of various taxing levels. Regardless, there is still an on-going push to raise income tax rates, reduce tax deductions, or a combination of both. The result is less money available for spending. If a company has to pay more in taxes it is common to pass this on to consumers in the form of higher prices. This in turn, along with increased individual tax rates, reduces disposable income for individuals. As long as the country continues to practice deficit spending and rack up increasing national debt, the pressure to raise taxes is going to exist than if a budget is balanced.

Reduced Spending on Critical Services

When a government finds itself collecting less in taxes than its spending obligations, it is not unusual to see expenditures for certain programs reduced. Unfortunately this is not always a logical process. There may be senior citizens who have paid into Social Security and Medicare only to see their payouts remain static and insufficient to meet needs. Likewise spending on maintaining national highways may be curtailed. At the same time, the government may actually increase spending on things that don’t matter, such as research on subjects that have very little chance of benefitting people. It’s like a sending a five year old to do the grocery shopping with no supervision. They will probably return with candy, cookies, and a host of items with very little nutrition.

Inflation

When the federal government fails to collect enough taxes to meet obligations then they borrow. This borrowing is commonly done by having the Federal Reserve make purchases of newly issued government debt using money that had not previously existed. As a result the amount of money circulating increases. Additional money circulating in society creates an inflationary effect, thus reducing the purchasing power of the dollar. This impacts everyone, but particularly senior citizens and businesses that are highly cost sensitive. For example, if the cost of supplies increases dramatically for a restaurant, it is very difficult to fully pass this on to customers in the form of higher meal prices. People have a limit to what they are willing to spend. In the case of a restaurant and other businesses as well, the increased prices for goods and services puts pressure on companies to increase wages. Unfortunately some of the ways companies handle this is to hire less-skilled workers, reduce the number of employees, and reduce the hours of remaining hourly employees. Inflation sets up a vicious cycle. Just as a side note, inflation is further increased with increased money supply through the process known as fractional reserve banking. You might want to read up on this as it is both interesting and somewhat frightening at the same time.

All the above is really to say five things:

  1. Don’t be fooled by someone saying the national debt doesn’t matter
  2. Don’t operate your business like the federal government
  3. Spend less than you collect
  4. Make borrowing a last resort
  5. If you are in debt, develop a plan to get out of debt

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

Share

Leave a Reply

Enter your email address:

Delivered by FeedBurner