Growing Government Debt Hurts Small Businesses

In late January, the U.S. Senate voted to raise the United States’ debt ceiling to $14.3 trillion, or $45,000 for every man, woman, and child living in America. Our massive federal deficit levels should send up warning flares to all who are interested in the short- and long-term health of our nation’s economy.

Economists have taken notice of what is happening on the government debt front. Recently, Barron’s Magazine published the first part of its annual Roundtable talks of 2010 on the nation’s economy. Many of the participants warned of the long term consequences to the American economy of the explosion of government debt over the last decade. The total debt (the sum of government and privately held debt) of the United States doubled from 2000 to the present from $26 trillion to $53 trillion. This drove the debt (both public and private) to 370 percent of GDP or Gross Domestic Product, the highest since the Great Depression. Excessive government borrowing reduces resources available for private investment, prolongs the economic recession and sets the stage for a “jobless recovery” -- that is, if the economy recovers at all.

As economist Martin Hutchison has pointed out, large government budget deficits are particularly harmful to small businesses by “crowding out” the credit available to the companies that create a majority of the new jobs in our economy. Here is what Hutchison has to say on that subject:

Both the Bush and Obama administrations have emphasized government “stimulus” packages designed to get the American consumers to spend our way out of this serious national recession. As I have said repeatedly, this approach is nothing but a short term fix and won’t do anything in the long term to get our economy moving again. Consumers aren’t going to spend if they are worried – as they are today – about whether they will have a job tomorrow, or about the survival of their businesses. Instead, Americans are saving again - putting money away for their own “rainy day” fund. That is why the best long term “stimulus” program is the encouragement of savings and capital investment in order to create private sector jobs here in the United States.

At the same time, the federal government has to get serious about making substantial reductions in federal spending to bring down these unsustainable government debt levels. The Fed also needs to end the policy followed by Federal Reserve Chairman Alan Greenspan and Ben Bernanke of keeping interest rates artificially low, well below the true rate of inflation. These policies fueled the credit excesses which led to the creation and bursting of the first debt bubble and are setting us up for yet another bubble that will ultimately burst – the government debt bubble.

Again, economist Martin Hutchison makes a sound case for setting short-term interest rates in the 5 percent to 6 percent range, a level that would be “above the current and impending rate of inflation.”

It may be a short term fix to pile on more government debt, as a means of “stimulating” the economy; but, in the long term, it only digs us into a deeper hole. Monetary policy which keeps interest rates artificially low, also makes a bad situation worse in the long run.

Government spending has to come down while interest rates should be set at an appropriate level, taking into consideration inflationary trends. These actions may cause us some short term pain, but they are essential elements of a long term economic policy to get small businesses creating jobs again and putting Americans back to work.