The Congressional Budget Office approximates the United States budget deficit of 2009 at $1.414 trillion dollars. Projected deficits for the coming year, assuming the same laws of 2009 (not including new spending initiatives like health care), predict decreasing yet similar deficits.
In the past, the U.S. government only ran deficits to finance wars, and did this through World War I. Since 1940, with World War II and the New Deal, budget deficits have been employed to rescue the United States from recessionary economic times. Consequently, a significant portion of the U.S. budget pays out a large sum to growing interest for past debts, while borrowing more to pay current deficits.
This government spending scheme, which characterized much of the 20th century, and now the 21st, oddly resembles something we witnessed crash in December 2008 with Bernard Madoff. Bernie was arrested and convicted in 2009 for his operation of a massive Ponzi scheme, or now more appropriately titled “Madoff scheme.”
Madoff schemes work as such: The scheme operator invites new people to pay a base investment. He gets them to join by promising high returns as dividends. He pays these dividends using base investments from new investors. This cycle requires new investors to constantly join.
This scheme is considered illegal because it “inevitably must fall apart.” Even if every person in the world joined, the scheme would fail. But it always fails before it gets anywhere close.
For this fraudulent business, Bernie was prosecuted and publicly castigated. But he was very faithful in his promised returns of 10 to 17 percent to his clientele. Once recession hit, he could no longer get new investors to join while his current investors opted to leave, causing his failure to pay dividends and ultimately unraveling.
This business is illegal for people, but not for Uncle Sam. Our politicians promise unnaturally high economic growth and maintain it by continually borrowing large amounts from foreign nations. The politicians, particularly presidents, care not if this will eventually fail since their careers will likely end before then. Or, if politicans did try to stop the government-run Madoff scheme, constituents would be the ones with empty pockets and ultimately try to remove the officials who took a stand from office.
Elected officials face an interesting dichotomy: Should they cause a temporary slowdown in economic growth (by stopping unsustainable borrowing) and lose their political position; or do they maintain the status quo, keeping their jobs yet forsaking forthcoming generations?
Conversely, we unwisely elect politicians based on the heaviness of our wallets and thereby neglect our future children.
Just like Bernie’s business, our Capitol Hill leaders strive for economic growth (investor returns) by spending money (paying dividends to investors) beyond tax revenue and finance it by borrowing from foreign nations (inviting new investors).
This manner of spending yields a temporary gain, just as using a credit card allows us to buy a few goods that we would struggle to otherwise purchase. We usually realize, however, that we cannot payoff incessant credit card debts with more credit cards. It works for a few months but always catches up.
The same principle is true for Madoff schemes. It pays off for a while but always catches up with the scheme’s promoter. New investors stop and the scheme crashes leaving the promoter imprisoned and the investors broke.
People in credit card debt and those managing ponzi schemes do not get to walk away. They are stuck with it until they pay it off, go bankrupt or go to jail.
But Uncle Sam is different. He gets to walk away, usually after something like four or eight years. He never faces the long-term consequences. The failure of the scheme never catches up on a personal level. He just passes them on to the next person in line and takes credit for “improving” the economy. And he performs this with complete legality, unlike Bernie.
Our legal system offers great incentive to prevent this sort of Madoff fraud in business and daily life. Yet we, the people, fail to hold our government accountable for this fraud that jeopardizes our future welfare.
Since it seems politicians often care more about the continuity of their careers without regard to our long-term welfare, we must incentivize our politicians to think in the long term by electing those that will. This is a problem of democratic politics: Who is willing to make the unpopular decision necessary for the long-term economic viability of the United States?
No generation has been willing to step up and pay down American debt for their children. Shall we imitate our parents and pass it on to our kids? Let us be the generation that considers our children’s and their children’s welfare before our own. With this leadership, we would become a great generation.
Jensen Carlsen is a senior majoring in economics and mathematics. His column “The Bridge” runs Wednesdays.