The Debt is not the Biggest Problem

The Republicans caved in once again, agreeing to suspend the debt limit until mid-May.  They are kicking the can now so that they can kick it again in a few months.  Perhaps they will end up agreeing to some future spending cuts that are not binding and are not even actual decreases in spending.

In any case, I know there is a lot of talk about the massive debt.  It is certainly a major concern, but I think it is more of a symptom than the actual illness.  In some ways, the debt itself is even more symbolic than anything.  The true problems ahead will not be because of the massive debt.  The problem is the dependency on government.

While Mitt Romney talked about 47%, there is actually a far greater percentage who are dependent on government.  I am not saying anything negative about these people.  It is most of us.  Most people have been dragged into the situation, especially since they are forced to turn over a good portion of their money.

People dependent on government include Social Security recipients, food stamp recipients, farmers, government contractors, people on Medicare and Medicaid, parents who send their kids to government schools, military personnel, and millions of other government workers.  These are just a few of the major categories, but there could be a list of hundreds of categories of people dependent on government in some way.

The politicians have made it this way on purpose.  It helps perpetuate big government.  Most people say we need to get to a balanced budget, but they also don't want their favorite programs cut.  It is impossible to do both, so the politicians choose the side of big government, which is to keep spending.

While Americans will tolerate big deficits (even if they say otherwise), they don't generally tolerate extremely high taxes.  It seems like the federal government is unable to go past a certain threshold, which is approximately 20% of GDP.  Beyond this, Americans will revolt.

When the can can't be kicked any longer, Congress will have to cut spending.  This will probably only happen when we see higher price inflation and the Fed is forced to save the dollar and stop buying additional government debt.  When Congress is essentially forced to cut spending, it will be very painful for a lot of people.  It will be painful because of their dependency on government funding.

You can tell people all day long that they will be better off in the long run, but they do not want to feel immediate pain.  Most people try to defer the pain, even though that can make it worse.

If people were not so dependent on government, it would be easier to cut spending.  Then the debt wouldn't be much of a problem.  But the debt can be dealt with anyway.  Default is always an option, even if it is a painful one.

The only way we are going to see significant improvements in the economy, barring some technological miracle, is for spending to go down.  The government has to stop spending and misallocating resources on a giant scale.  The government bubble must pop.  Only then can we have real and sustainable growth that leads to a significant increase in our standard of living.  It is not a matter of reducing the debt as much as it is a matter of reducing spending.