Why Should Anybody Care About the Debt, Anyway?

If we have a jobs crisis, why are we talking about how to cut support for poor people's energy bills and summer classes?

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Progressives are infuriated with the president's 2012 budget and the rise of the deficit hawks in Congress. We don't have a deficit crisis today, they note. We have a jobs crisis, and yet we're talking about how to cut support for poor people's energy bills and summer classes. Isn't this insane?

No, I don't think the discussion is insane. But I do think it's unfortunate that the pols and the press haven't adequately explained what a debt crisis is and why we should care about it. Here's my best shot at breaking down the discussion into three simple questions:

1) What is a debt crisis, anyway?

2) Does deficit reduction have to hurt the poor?

3) If everybody agrees that the long-term deficit crisis is a health care crisis, why are we talking about cutting discretionary spending and Social Security?



Americans don't save enough to lend the government everything it needs to finance high deficits forever. As a result, the government has to borrow from other countries and pay them back with interest. Those countries expect to be paid back in full and on time. If investors doubt a nation's ability to pay back its debt, they will demand higher interest rates (look at Europe today). As borrowing costs for government increase, that cost trickles down into the average American's life, making it more expensive for families to buy homes or for companies to buy new equipment.

To squash a debt crisis, the U.S. government would have to build confidence among our investors. Confidence here isn't a wishy washy word. It's a real concept. We would have to prove to investors that they can trust us enough to lend us money with little risk.

How would we build confidence? There are two ways, really. First, the government can spend less money and send it overseas. Second, we can tax higher and send that revenue overseas. The first strategy would almost certainly cut domestic programs that disproportionately help the needy. The second could require rapid escalation of tax rates that could hurt growth.

There is a third option: The Federal Reserve could print money to avoid cutting spending or raising taxes. But more money in circulation in a churning economy would fuel inflation, raising the price of everything from grocery items to mortgages to small business loans.

The upshot: Imagine a scenario where your family faced higher prices for all goods, combined with higher taxes on your income, combined with fewer services for your parents and children, and you begin to understand what a debt crisis could feel like.

[Donald Marron has a great, deeper explanation here.]



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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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