PUBLISHED BY EL NUEVO HERALD ON OCTOBER 21, 2013
Fortunately, already is reached a bipartisan deal to open government operations again and raise again the debt ceiling until February 7, 2014. Though since 1972 have been made 17 closures of previous governments and since 1962 has risen the debt ceiling 74 times, these two variables have been taken recently as coercive measures to exert political pressure, regardless of the erosion that is caused to the creditworthiness of the country and the obvious consequences on the national scene.
Already in 2011 the rating agency S & P lowered the credit rating of the United States from AAA to AA +. Although this represents a monthly payment of more interest, investor confidence did not deteriorate as the demand for 10-year bond yield and 2.34% did not decrease. This means that buying U.S. bonds remains a guarantee for the investor because in U.S. is absurd to think of the possibility of ignoring the public debt, as indeed has happened in other countries, for example, Cuba in 1959.
Recent temporary closures of government as well as the unfounded doubts about raising the debt limit, doing nothing but undermine confidence in buyers. And this, of course, affects the revenue of the nation, destabilizing its budget. That same budget, which until only twelve years had surplus has deteriorated, among others, for the following factors:
• The wars in Afghanistan and Iraq, which meant high budgetary costs. This is complemented by the costs of medical care for disabled soldiers, whose care is permanent and represented at least 15% of the deficit in 2012. The cost of these wars was monumental because Pentagon contractors achieved extraordinary privileges because the government paid them above the actual market price. . The no-bid contract to Halliburton won for $ 7.000 million at the beginning of the Iraq war is still remembered.
• The tax cuts proposed by Bush and supported by Alan Greenspan in 2001, are responsible for a fifth of the budget deficit in 2012. And this tax was specially applied to the upper class in order to devote more resources to create jobs rather than continue buying properties. However, this effect was not achieved and instead, unemployment increased to reach the 2008 recession.
• The drug costs charged to Medicare formed an important part of the budget deficit. There is a provision of the law stating that the government can not negotiate drug prices with the pharmaceutical industry. This is only enabling this industry to the detriment of the national budget .
We must find a formula that allows us to re-stimulate the economy, without trying to make miracles in the short term.
We all want the deficit could be reduced right now; however, we can start with a strategy whose results have been verified before. This known as the "balanced budget multiplier" strategy is to increase taxes and spending at the same time, so that the deficit ratio is the same. If tax increases and expenditure are chosen intelligently, gross domestic product (GDP) could triple the increase in spending. The deficit will remain the same three years, but the country's debt will be reduced in five.
Of course, the implementation of this strategy has its art. Increasing taxes on the very wealthy reduces spending by 80%. Decreasing to poor increases it by 100%. This means that the wealthy invest 80% less and the poor spend everything down to the last penny. Logically, increasing the consumption of the poor, will also increase the demand for goods and services. Then again the wealthy will invest in order to meet that demand.
As we see, the strategy can be successful. The truth is that the debt problem must be addressed to avoid reaching the Japanese case, where debt is 1 quadrillion yen, exceeding 250% its GDP. We, still, are almost at par.
BENJAMIN F. DeYURRE
Economist and journalist.
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