24 Pages Posted: 27 Sep 2011 Last revised: 10 Oct 2011

Date Written: September 26, 2011

Abstract

The financial crisis and the ensuing Great Recession created unprecedented federal budget deficits in recent years. In fact, these events, combined with subsequent slow growth and two continuing unfunded wars, have resulted in a national debt that is out of control by all meaningful measures. This paper examines the current economic and political dynamics of the malaise.

Particular focus centers on two seminal events that at long last compelled serious consideration of the federal deficit and debt problem: the debt ceiling debate, and the subsequent Standard & Poor’s credit downgrade of U.S. Treasury securities. These catalysts shifted attention from failed monetary and Keynesian stimulus to spending and tax abatement as the means of achieving the long-term economic growth necessary to create jobs and restore prosperity, and thereby reduce borrowing and pay down debt.

The government deficit and debt are inextricably connected to economic growth. As such, the borrowing and taxation that finance almost $4 trillion of annual spending divert capital and demand from the private economy at the expense of GDP needed to manage the debt and spur employment. The paper presents proposals for accomplishing required deficit and debt reduction in contrast with the ineffective alternatives enacted to date, and in context with the political realities associated with implementing the solution.