U.S. Spending Crisis: Will It Be Remedied?

May 23, 2013

Over the last decade, the United States has gone through numerous financial crises. The federal government has been inflating the dollar and bailing out companies that have failed. This has caused a substantial deficit and debt, which will create an enormous financial burden on future generations, says the Cato institute.

In 2009, the government created the American Recovery and Reinvestment Act, which cost U.S. taxpayer $831 billion dollars. This policy gave stimulus money to several large corporations that were on the verge of collapsing. This policy was put into place to stimulate the economy and increase spending in the economy. Andrew T. Young, associate professor of economics at West Virginia University, argues in an article he published, "Why in the World Are We All Keynesians Again? The Flimsy Case for Stimulus Spending," that:

  • Each dollar of stimulus increases total spending in the economy by less than one dollar, which means that the economic benefit associated with the stimulus is less than the stimulus itself.
  • The evidence suggesting significant even short-run benefits of stimulus spending are weak.
  • Even advocates of fiscal stimulus acknowledge that the long-run consequences for the national debt are often dire.

These types of policies have been increasing the U.S. national debt, which can cause enormous problems down the road. Jagadeesh Gokhale, a Cato Institute senior fellow and a member of the Social Security Advisory Board, claims in a study, "Spending Beyond Our Means: How We Are Bankrupting Future Generations":

  • Current federal policies would increase the fiscal imbalance to 9.0 percent of the present value of gross domestic product, or 19.7 percent of the present value of payrolls.
  • Today's middle-aged workers would receive such large federal transfers by way of Social Security and Medicare benefits that their prospective lifetime net tax burdens are almost completely eliminated.
  • Gokhale concludes that these problems could be solved by increases in taxes and spending reductions, but these are "precisely the policies that Congress is seeking to avoid in the short term."

Congress must act in order to save generations from the crushing burdens of debt, but the questions still remains: will they?

Source: "The Looming Fiscal Train Wreck," Cato Institute, May/June 2013.

 

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