When the US housing superbubble popped, the entire world looked as though it might head into a Great Depression. This was averted, however it did cause a Great Recession that sped up many pre-existing problems. Amongst these was unsustainable acretion of national debts. Automatic and deliberate spending increases resulting from the Great Recession ballooned national debts. These, if allowed to grow to too great a size, have the capacity to cause a crisis, most conspicuously at present exploding in Greece. Because Greece is a small country, its effect as a contagion is relatively managaeble compared to what is likely to erupt in the event that a large nation, say Italy or even the US, undergoes a similar transformation. In fact, if Greece didn't have the euro, it is small enough that it might not have been important. However, large countries are either way.
The US may again reak havoc on the world economy, or else it may have its favor from 08 repaid to it, if the US government and governments of other large or numerous nations fail to solve this problem before it is too late.
The problem is perpetual large deficits. When a deficit exceeds GDP growth and inflation, it increases the real size of the national debt. In the short term, this diverts investment capital from the private sector by having the government compete with it for credit. In the long term, it breeds dependency upon credit to fund a large portion of government spending. This spending breeds dependency upon credit and comes to fund a significant portion of government activities. At the same time, it piles up interest payments which come to form a large portion of the entire national budget. This can go on for only so long before credit becomes more expensive as the government is seen to be a less and less reliable debtor. Eventually, interest rates skyrocket, borrowing becomes impossibly expensive, and the only way out is default or hyperinflation. This, along with the crisises of confidence, cause the economy to go into meltdown, further reducing revenues, thus melting away at both the government and private sector.
It is one thing to argue about whether or not government should be bigger, but either way it is clear that perpetual large deficits are unsustainable. And it is also clear that democracy naturally trends towards them until the extent of the problems caused by them are huge and obvious because people otherwise, with their votes, reward spending and punish taxing. Even countries generally considered exceptionally responsible, like Germany, have enormous national debts.
There are however obvious solutions to this general problem. One is to adopt the regional solution at the national level:
Balanced budget amendment - Wikipedia, the free encyclopediaEvery US state other than Vermont has some form of balanced budget amendment; the precise form varies. Indiana has a state debt prohibition with an exception for "temporary and casual deficits," but no balanced budget requirement. It has around $18 billion in outstanding state debt. The governor is not legally required to submit a balanced budget, the legislature is not required to approve appropriations that are within available revenue, and the state is not required to end the year in balance. An unusual variant is the Oregon kicker, which bans surpluses of more than 2% of revenue by refunding the money to the taxpayers. Keynesian economists such as Paul Krugman have argued that state-level balanced budget amendments worsened the late-2000s recession by forcing states to cut services in the middle of a slump.
A more complicated, but potentially more ideal, solution would be to write up an amendment that prohibits deficits during good and mediocre economic times, but allows them during bad economic times. Although large deficits are unsustainable if they are perpetual, they are easily sustainable and justifiable if they are only occasional.
The most complicated solution would be to create a Federal Reserve-type entity that would determine when deficits were and were not prohibited and which would be sufficiently insulated from the electorate as to not let the electorate corrupt it with perpetual demands for more cake today at the expense of tomorrow.
All of these basically function like regulations do in general in that they aim to prevent abuse, but in the process of doing so inevitably create some amount of waste that may or may not be justified by the benefit accrued by preventing abuses. The looser the regulation is, the more likely it is fail in its intended purpose but also the less unintended waste it will cause.
At any rate, chronic budget problems are not insoluble, they just require a bold binding solution. The GOP has talked about this, but they've messed it up by throwing in alongside this measures acceptable to them but unacceptable to liberals-like constitutional tax and government size caps. What would really be ideal is if they offered a short-term compromise on tax issues in exchange for further spending cuts and a balanced budget amendment that takes effect within the next 5-10 years and which doesn't carry any strings to it that only conservatives can appreciate. If the elected representative want bigger government or tax cuts fine; just don't do it on credit cards.
So those are my ideas, the general question is What solutions can we apply that, given human nature, are likely to work and stick?