Both President Obama and Republicans in Congress are promising action on the country's massive deficit and debt problems, so the debate may finally be getting down to specifics. In Where Does the Money Go? Your Guided Tour to the Federal Budget Crisis, authors Scott Bittle and Jean Johnson offer a primer on what's at stake for entrepreneurs.
Why is solving the budget issue so important for entrepreneurs?
The country's debt is on track to become so enormous that continuing to live with it just poses too many risks to the economy. If current projections play out, the national debt will grow from about 60 percent of GDP last year to 100 percent in about a decade, and closes in on 200 percent by 2030. There's a lot of controversy over exactly how big the national debt has to be before it's a problem, but most economists say those projections are heading into the danger zone.
What's the worst that can happen?
The worst scenario would be if international lenders begin to lose confidence in the United States' ability to meet its obligations. That could precipitate a debt crisis like those in Greece and Ireland, and there's no reason to assume that we're magically immune. We don't even know what kind of havoc a debt crisis in the world's largest economy would create worldwide. Even entrepreneurs with great ideas and sound planning could get sucked under if the world economy is in disarray.
How can we avoid that?
We have one great advantage. Right now, investors worldwide still see the United States as one of the best places to park their money. That means we still have time to make our own decisions about getting the budget on a more sustainable path. It will take years to solve the problem, but if investors see we're working on it, they're more likely to stick with the United States and keep buying our bonds.
If we avoid a debt crisis, what else is there to worry about?
There are other bad scenarios, which are actually more likely than a debt crisis, but they're more of a slow squeeze than a sudden crash. For example, one risk is that all this government borrowing will crowd out private investment, reducing the amount of capital available for startup businesses and expansion. That's not going to be good for business innovation. Another risk -- really more of a certainty -- is that the government will face the same challenge a lot of businesses have: its fixed costs will overwhelm the rest of the balance sheet. For the federal government, that means interest on the debt, Social Security, and especially the health care programs like Medicare and Medicaid. In as little as 10 years, the government's auditors say these costs could suck up 90 cents out of every dollar in revenue. That doesn't leave much for improving the nation's infrastructure, rebuilding math and science education, or the other investments that could help the U.S. stay competitive.
What about interest rates?
Higher interest rates are another danger posed by procrastinating on this problem. If the country has any trouble selling Treasury bond -- that's how we borrow money -- it will have to raise interest rates, and that will ripple throughout the entire economy.
Are tax hikes on the table?
Mathematically, it's possible to balance the budget by just cutting spending-just as it's mathematically possible to do it solely by raising taxes. But going either route alone would be a jolting shift. Politically speaking, it probably has to be some of both. The numbers are so huge that even if we had skipped the Wall Street bailout, the stimulus, and the wars in Iraq and Afghanistan, we'd still have red ink flowing.
So what's the answer?Compromise. There are hundreds of practical ideas on the table. The problem is getting the political world to move from rhetoric to action. Refusing to compromise -- and getting nothing done -- will put the country and the economy in even greater peril.