“America is on a dangerous budget path. Current spending and debt are

dangerously high, and future spending and debt are on track to rise even higher in

large part due to the increasing entitlement spending” (Boccia, 2013). As recent as

February of 2014, congress has decided to yet again raise the debt ceiling for

America, this time capping the limit at $17.2 trillion dollars. This marks the fifth

effective increase in the debt ceiling since August 1, 2011, when it was $14.3 trillion

(Sahadi, 2014). If America continues to raise this limit, how is the debt crisis that

our nation is currently experiencing going to affect our businesses; and more

importantly, us as individuals in future years? The issues that need to be addressed

to see where the root of this problem starts, and where the solution can be found

starts with looking at the events other countries have or are currently facing, and

how they have come up with strategies to solve their debt crisis. From there we

need to focus on the economic trends that we are currently in, and the negative and

positive effects that they are having. The effects that will be discussed are how

creditors view America, how it affects businesses through prolonged drag and

economic growth, and how it will affect the individual with inflation and increase in

taxes. As this paper addresses these issues, it will reveal the scary truth of the tolls

that will be put on America if they continue with their dangerous budget path.

“The warning bells were sounded in early 2009: The U.S. government had to

act swiftly and forcefully to avoid repeating Japan’s painful experience of sustained

economic stagnation” (Scissors and Foster, 2011). Policies that were set up during

the Obama Administration have failed to this point, and America was facing a long-

term standstill that may occur unless the federal government decided to take steps

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toward putting the federal budget on a credible path toward balance, by cutting

spending quickly and steadily. Japan, after the devastation from World War II, grew

to have the globe’s second largest economy measured by gross domestic product

(GDP). “Many observers thought it was only a matter of time before Japan replaced

the United States as the world’s leading economy” (Scissors and Foster, 2011). In

2010, Japan no longer ranked in the top 20, and would have fell further if it were not

for Europe’s economic crisis at the time as well. The American situation is certainly

not identical to the Japanese situation, but there is no reason not to think that if

America continues on the path that it is currently on, that it is immune from this

scenario. Foster and Scissors believe that “in 2030, if current trends continue, it

could be that the U.S. will have been passed by China in economic size. Worse, if the

U.S. repeats Japan’s mistakes, then America may be at risk of being rendered an

afterthought on the world stage, much as Japan is now.”

How did Japan get into the situation that it is in now? What mistakes did they

make after growing from nothing to the second largest economy in the world?

Japan’s debt is almost entirely domestically financed, which means gigantic sums are shifted from the private sector to the public sector, where the social return on investment is almost nil and the yields paid on the debt are only slightly better. The huge debt and oversized government has sapped Japan’s domestic sources of growth (Boccia, 2013).

Even though there debt is domestically financed, it is arguably the world’s most

indebted major economy, with the public debt close to twice the level of GDP. “This

is a problem created during the lost decades –which is what the period of economic

downfall in Japan is know as – not before. Nominal debt soared 170 percent from

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June 1996 to June 2010 even while GDP declined slightly” (Scissors and Foster,

2011).

Lessons that America can learn from this recent scenario focus on the federal

budget. The Congressional Budget office estimates that the federal budget deficit in

2011 was $1.3 trillion, matching the 2010 deficit and down just slightly from the all-

time record of $1.4 trillion in 2009 (Congressional Budget Office, 2011). Under the

Obama administration, the federal government has run deficits in three years

totaling twice what occurred under President George W. Bush in eight years.

Mentioning again that even though America’s case is not Identical to Japan’s, “the

pattern of U.S. government deficits has taken a decidedly Japanese appearance”

Scissors and foster, 2011). There is an explanation for these deficits, which tie in to

America’s recession. With many people losing their jobs, this tends to them relying

more on Government funding with food stamps and unemployment insurance

benefits (Elmendorf, 2011). According to Fraser in her research Anti-poverty

spending, which includes food stamps, income, and health aid, has surged 49

percent since 2002. Spending on food stamps alone has doubled from $42 billion to

$85 billion in 2012 (Fraser, 2012). Represented by the graft below, the sources of

spending growth can be pinpointed to Social Security, Medicare, Medicaid,

Obamacare, etc. As the graph shows, average tax revenue is at 18.1%, and currently

while we are spending 5% over the revenue now, it is expected if we continue with

the current trends that we have now, we will be spending twice that much by 2037.

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The trends that have been presented already in this paper just help tie into

the devastation that Japan experienced within the past two decades. As mentioned

in the beginning paragraph, the Federal Government needs to find places that it can

cut spending quickly and steadily. Many arguments are made that there are not

places within the budget that they can cut from without taking a toll on all of

America. Though many may argue, by opinion, that different spending acquisitions

are not necessary such as the following few:

In 2008 and 2009 alone, the Department of Justice spent (DOJ)$121 million to host or participate in 1,832 conferences.

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The Department of Agriculture’s Office of the Chief Information Officer funded a $2 million intern program. Only one intern was hired full time as a result.

The Bureau of Indian Affairs funded a fish hatchery that never saw a fish hatch for fourteen years, continuing funding even after the land had been converted to office space. Taxpayers spent $46.1 million in fiscal year 2012 to operate the national fish hatchery system.

The Environmental Protection Agency awarded a $141,450 grant under the Clean Air Act to fund a Chinese study on swine manure and a $1.2 million grant to the United Nations for clean fuel promotion.

These examples are only a few that Frazer listed in her report Government Spending:

Growth and trend Charts of US Federal Spending by Year. Again, some people may

support the spending that is listed above; and other may not understand why the

government would fund such programs.

In 2011, the Budget Control Act requested that spending be cut by $1.2

trillion in 2013. “When the Super committee failed to reach an agreement on this

budget cut plan, it triggered sequestration” (Fraser, 2012). Fraser continues to

explain that sequestration is a series of automatic budget cuts totaling $1.2 trillion,

where 50 percent of its reductions affects defense. The defense portion of spending

though only represents 17 percent of federal spending in 2013 (Fraser, 2012).

“Mandatory spending accounts for 64 percent of the budget in 2013, but receives

only 15 percent of the sequestration cuts. Two of the largest spending programs,

Social Security and Medicaid, are exempt from sequester savings, as is all but 2

percent of Medicare” (Fraser, 2012). As explained in the graph below, the smaller

shares of total spending received the larger cuts, while the larger shares received

smaller cuts.

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With this information laid out, how is it that creditors such as Standard &

Poor’s (S&P) rate America? “In August of 2011, S&P downgraded the United States

credit rating from AAA, and really best in class, to AA+” (Foster, 2011). This made

America realize two important things, which Foster lays it out as:

“First, as The Heritage Foundation and many others warned, the spending reductions in the deal negotiated by President Obama to raise the debt ceiling were entirely and woefully inadequate. Second, the global economy, the national economy, and state finances have all in their own ways been delivered a mighty and frightening body blow” (Foster, 2011).

The United States for many decades has been viewed as the golden standard of

credit quality, and with our recent financial crisis, we have slowly loss our position

in that standing. Where would we put the blame for the loss of our credit rating?

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Foster writes that Unaffordable entitlement programs were built up Congress after

Congress, President after President, and their imposing fiscal dangers for the future

were ignored thereafter. He also states, “while not solely to blame, President Obama

and his allies are most certainly preeminently to blame” (Foster, 2012).

With this information, we can conclude that if America continues on the same

economic trends that we have now, in the near future, we as Americans, and

business owners can expect higher interest rates, higher inflation, and the

disappearance of private investment. A suggestion that is based off a solution

proposed by Boccia is that Congress and the President should stop delaying and

“suspending” the debt ceiling, which ultimately leads to raising the debt ceiling

through a “net effect” (Sahadi, 2014). They need to pass laws to cut spending and

balance the budget within in 10 years. Entitlement spending needs to be reformed,

and distributed with smaller amounts to the needs of the people. As well screening

needs to take place for those who receive help from the government, and not the

screening that is used now, but a more, in-depth, and personal screening. To end the

research paper, and to summarize the trends that the Federal Government are

following currently, the preceding graph describes how our Government is spending

money, while we are still currently in debt.

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(Federal Budget in Pictures, 2014)

A quote from www.heritage.org states “Families understand that it is unwise to

repeatedly spend much more than they take in. But Washington continues its

shopping spree on the taxpayer credit card with seemingly no regard to the stack of

bills the nation has already piled up.”

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Works Cited

Boccia, Romina. "How the United States' High Debt Will Weaken the Economy and

Hurt Americans." The Heritage Foundation. N.p., 12 Feb. 2013. Web. 25 Mar.

2014.

"Debt Ceiling Resets to $17.2 Trillion." CNNMoney. Cable News Network, 11 Feb.

2014. Web. 25 Mar. 2014.

"Federal Budget in Pictures." What If a Typical Family Spent and Borrowed Like the

Federal Government? N.p., n.d. Web. 25 Mar. 2014.

Foster, J. D. "S&P Downgrades U.S. Credit Rating: What It Means." The Heritage

Foundation. N.p., 6 Aug. 2011. Web. 25 Mar. 2014.

Fraser, Alison. "Government Spending: Growth and Trend Charts of US Federal

Spending by Year." The Heritage Foundation. N.p., 12 Feb. 2012. Web. 25 Mar.

2014.

Scissors, Derek, and J. D. Foster. "Avoiding America's Lost Decades: What the US Can

Learn from Japan." The Heritage Foundation. N.p., 18 Oct. 2011. Web. 25 Mar.

2014.

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