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The total government debt which has been accumulated over time is about $14 trillion. The annual economic output of the United States is about the same, subject to variations in economic activity. There is widespread agreement on all sides that the Federal Government, with power over its own spending in annual budget negotiations between the Executive and the Legislative branches, the Congress vested by the Constitution with the power to control the purse strings, is spending beyond its means. The means are tax revenues. The government’s annual budget is about $4 trillion. Government revenues fall short of government spending by at least $1 trillion every year leading to the overall imbalance of about $14 trillion over the years.
Relevance to the people
As the overall government indebtedness to those within its borders and to foreigners, through the sale of government bonds, approaches and exceeds the capacity of any country to produce goods and services, because the lenders gradually lose confidence in the ability of the country to repay and, therefore, will ask more in interest to keep lending, whether those lending be Americans or foreigners. Servicing the interest adds to the budget burdens of the government.
If the government continues to live beyond its means, the rising cost of borrowing will also increase the cost of investing in machinery and people because the interest rates of long-term government bonds are tied to the long-term borrowing costs of businesses and households. This will, therefore, raise prices and wages. Which, in turn, will decrease the purchasing power of the US dollar.
To maintain the purchasing power, the Federal Reserve will have to raise interest rates in the immediate future to slow down the economy, setting into motion a downward spiral of gradually diminishing economic activity.
Therefore, the government has little choice but to constrain its spending to annual tax revenues, whatever they may be, which is also known as the budget constraint, because despite its ability at the Federal level to print money, the government’s books are no different over time from that of a normal household.
What the Congress and the White House Should Do?
The Federal government is different from the state and local governments in that it can print money and issue debt. In the event of wars or other needs which could arise the government needs flexibility to spend more than its means provided those expenditures are justifiable by the scheme of Constitutional checks and balances, as the framers had intended. This is why, the Federal government is not required by the Constitution to balance its annual budget, but does so out of a sense of fiscal responsibility. The government, therefore, must not amend the United States Constitution to pass a balanced budget amendment.
The government must, instead, pass legislation to:
Require that the annual Federal budget be frozen until Fiscal Year 2021 at the level of Fiscal Year 2012, in 2012 dollars, whatever the annual rate of inflation used by the Treasury Inflation Protected Securities (TIPS).
Require that the debt ceiling must not be raised for Fiscal Year 2012 and thereafter until by 2021 the cumulative government debt at least diminishes to 60 per cent of the projected 2021 annual income in 2021 dollars from the current level of about 100 per cent in 2011 dollars.
Require that all Treasury debt issuances, domestic and foreign, be frozen with immediate effect until Fiscal Year 2021.
Require that the Federal Reserve finance the government budget deficits through 2021 through the purchases of outstanding Federal debt.
Require that Federal Reserve policy be reformed to include an inflation targeting range of 0-5 per cent consumer price index (CPI), the Federal Reserve Act as amended, with comprehensive data releases, including the Federal Reserve’s Greenbook and Bluebook, within 3 weeks of every interest-rate setting meeting at a press conference held by the Federal Reserve’s Chairperson. For how Federal Reserve policy can be adjusted to suit the current circumstances in concert with the rest of the government and to be consistent with this legislative proposal also see: The Impending Government Shut Down.
Require that the annual Federal budget be passed into law no later than the last day of the preceding fiscal year or September 30th of every year.
Require the Federal government to balance the budget every 10 years, beginning Fiscal Year 2012, to allow for economic ups and downs and to give sufficient flexibility to finance unforeseen expenditures, upon the advice and consent of the United States Congress, through borrowings by issuing debt.
Require that the ratio of the overall government debt to the annual income of the United States shall not exceed 60 per cent at any given time.
Require that by 2021 the Congress must decrease the cumulative government debt to 60 per cent of the projected annual income in 2021.
Require that comprehensive tax and international trade reforms be studied, formulated and passed into law to increase tax receipts and to direct real investment, domestic and foreign, into the United States.