US Credit Worthiness, Tax Hikes and the Balancing of the Federal Budget

Krishna Tummala, director of Kansas State’s public administration program and professor of political science simply explains the reason for the nation’s burgeoning debt:

People demand more services but are not always willing to pay taxes. The politicians promise more services without telling them the cost and that they must be paid for. Instead, they use the so-called painless way to go about this by allowing deficit budgets. This means not only the politicians must educate themselves on the issues, but their constituents as well.

He adds that the argument that the federal government should live like we do, within our means, is hypocritical. The personal debt of Americans is close to $2 trillion, so effectively we all live in debt. The federal government just is behaving like we do. Moreover, it has the responsibility for the common welfare and general defense, as the Constitution requires. Yet state governments, 48 of which require a balanced budget by law, are favorably compared to the federal government. But state governments differ in their budgeting compared to the fed. The federal government has only one budget, but each state has two, a current account and a capital account. Only the state’s current account—effectively its day to day running costs—must be balanced. The capital account is the place for major project expenditures, and they have to be carried forward annually.

The federal government borrows money through Article I of the US Constitution, and had it not been able to, it could not have borrowed $15 million from Britain in 1803 to complete the Louisiana Purchase. It doubled the size of the country, made it possible for it to be united coast to coast, and without it, it perhaps would never have become the world power it is. Now the national debt is $14 trillion, but it is not owed to the British. The Chinese have around $3 trillion of it.

People who want a balanced budget, many of them Republicans, have to realize that it will need taxes to be raised. Cutting expenditures will not be enough, and will shut down the country first. But Republicans will not condone tax hikes because the people with the money are leading Republican donors. So, cooperation between the parties has been lacking, only quarreling, a lot of posturing and little dialogue. The deadline for increasing the debt ceiling is 2 August, with the country’s credit worthiness at stake. If the debt ceiling is not extended, the country will default, hitting the economy of the whole world, everything now being so interconnected.

The country’s credit worthiness underpins the financing of debts. Foreign countries must have confidence in the US economy or they will not be willing to lend. Of course, credit ratings agencies such as Moody’s and Standard & Poor’s can evaluate the soundness of the US economy but the ratings agencies were giving excellent ratings to the financial sector “before it went belly-up”, Tummala wryly concluded!