Throughout the 2012 US election campaign, Mitt Romney and Barack Obama have each tried to style themselves as a competent steward of the US economy, and to brand the other as fiscally irresponsible. However, as is often the case with election debates, history and context are forgotten or dismissed entirely, and long-unaddressed, fundamental underlying issues are clothed in the deceptive gowns of illusory, short-term rhetoric. This is exactly what has happened in the central debate on America’s debt and the US government’s deficit.
Obama and Romney both place deficit reduction at the top of the agenda. One of the central elements of reducing any government deficit is to increase government revenue. However, apart from the more sensitive issue of taxing millionaires, both presidential candidates recoil at the idea of raising taxes and instead they boast about cutting them. This is nonsensical if either were truly serious about dramatically reducing the deficit. In an absurd display, both sides not only pledge to decrease government revenue (by reducing taxes) but they also promise to achieve something requiring the very opposite action: reducing the deficit. Such posturing gives credence to ideas that US election debates are little more than glorified theatrics, devoid of substance.
Whether through spending cuts or increased taxes, deficit reduction requires politically unpopular policies. In reality this means that taking action to balance the budget is not in the interest of either candidate. Political careers are transient, short-lived affairs which rely on popularity now as opposed to later. It comes as no surprise then, that budget deficits are not a new issue, in spite of the claims of rhetoricians who blame it all on either Obama or Bush.
As the figure shows, the US government has been running a budget deficit for decades. Although Bill Clinton oversaw the creation of a small surplus, he also presided over a period of buoyant economic growth; a luxury not afforded policymakers in today’s sluggish, crisis-ridden economy.
In addition to its persistent budget deficits, the US economy has long been afflicted by another kind of deficit: a current account deficit. This occurs when a country imports more than it exports and loans more from the rest of the world than it loans out.
Lengthy current account deficits of the type shown above are associated with declining competitiveness and over-consumption. Simply put, the United States as a whole- not just its government- consistently lives beyond its means. For an industrialised country, running such high deficits with the rest of the world is historically unprecedented.
Statistics like those displayed here certainly give the impression that tackling the debt is an urgent issue for the US. But is this really the case?
To finance government debt, the US issues “treasury bills”, which are government bonds traded on financial markets like any other securities, stocks or investments. When a financial actor buys a US treasury bill, they are, in effect, lending money to the United States and they will receive interest on this loan. When politicians talk of “paying interest on the debt,” this is what they mean.
The willingness of international financiers to buy US bills determines the sustainability of the USA’s debt. In the case of most other countries, sustained government deficits and current account deficits of US magnitude would be punished by the international financial markets. In Europe, large government deficits and declining competitiveness led to higher interest rates on southern European government bonds as investors ceased to regard these countries as attractive destinations for investment. But for the USA, with its growing levels of debt and unprecedented current account deficits, interest rates are historically low and international financiers’ demand for US treasury bills has actually been increasing.
How can the international financial world happily continue to lend to a USA with soaring debt and poor competitiveness?
This unique situation has been called the United States’ “Exorbitant Privilege,” and it can be explained by the dominant position of the US Dollar in the international monetary system. The US Dollar is the world’s reserve currency, making it the currency most often used to settle international transactions, the currency which is regarded as the most secure asset and thus the currency which is held in the largest quantity around the world. Recent economic crises have actually hastened the flight of capital to the “safe haven” of US treasury bills. This gives the US access to seemingly unlimited financing from the rest of the world, making debt much less of an urgent problem than all the political point scoring about the size of deficits would lead one to believe.
Without any considerable short-term risk, the US has proven capable of piling up increasing amounts of debt extremely cheaply; but at the same time it has seen its competitive position decline steadily. This state of affairs points to a failure of the US to invest the borrowed money into increasing productivity. While much of recent debt has been used to combat the economic crisis, it has also been used to finance the transient and fleeting political goals of tax cuts and wars- two things which increase the budget deficit and overall debt further.
Yet Obama and Romney still maintain that substantial deficit reduction is integral to their economic policies, and a central goal of the coming presidential term. But as long as the “Exorbitant Privilege” continues, they can get away with doing little to tackle US debt. The historical record and the facts at hand, therefore, point to the persistence of America’s deficits and to one of the central issues of the election as having been little more than a sham debate.