With the government default looming and congress scrambling to push their stop-gap measures, it's a good time to analyze how we got here, how it affects us, and what we should do.
You can think of this situation like a person with a credit card. The person knows that they won't have enough money or credit to pay all of their bills, and they know there is no way to forego the spending or raise the money before they run out. As a result this person calls the bank to get a credit limit increase. In reality, the bank would require the limit to go down again in a month or 2. However, the spend-happy politicians don't want it to, and are fighting against debt-ceiling plans that cut spending back to this level in the future.
How we got here
We in America have a long tradition of wanting what we can't (or shouldn't) have. We have lots of problems with delaying gratification, and in large measure, our populous is financially uneducated. I'll refer you to the Illinois man interviewed on national TV while waiting for a government payout claiming that he was "waiting for obama money" which he thought came from "Obama's stash". I'll also show you this graph of the personal (not government) savings rate:
In addition to failing to save, our population is borrowing more than ever before. Look at this graph of consumer (not government or business) credit outstanding:
Since our population can't seem to constrain their spending, why would a governmental body elected by our population? We are in a period of extreme gluttony, but we may be hitting the ceiling of what our government can hand out.
How it affects us
We've come to rely on the government for lots of things that we don't even realize. One of the hidden dependencies is a little thing called risk-free debt. The government issues bonds, which hold no risk, and provides the markets with liquid, low-interest alternative to holding cash. This allows big banks (and investment firms) to forego unprofitable investments in leu of flexibility and guaranteed return. All the while, the money is funneled into banks that have lots of highly profitable opportunities, for a cost. In addition to the people who would fail to get paid in the event of a government default, this vital banking mechanism would crumble.
Thousands of people are currently employed by the US government. Many more than I think should be, but that's a topic for the next section. While I may not agree with their employment, you cannot argue that they provide a service. If the government defaults and cannot pay their debts, they also cannot pay their wages. In addition to thousands of people losing jobs, any services that are depended on will cease to exist.
Social services such as social security, medicare, medicaid, etc. which people have planned for, depended on and expect on a regular basis will cease to function.
When the government needs to step in and intercede in a situation, it costs money. It doesn't matter if that means buying trailers for hurricane evacuees or sending in the military to stop genocide in a foreign country. A government default would throw serious concerns on the validity of all government debt and not only make it harder for the government to raise money, but make it significantly more expensive (the government does pay interest on its debt, and after a default that rate would increase).
What we should do
A large part of the problem is that the federal government is already far too large. It's easy to expand the government to do something if they're only taking 15% of your income to begin with. When the government can't pay it's bills and it's taking over 30%, people get upset. Many of the services offered by the federal government are also offered in the private industry. Our government needs to begin transitioning out of these industries.
All stimulus programs need to be immediately ceased (I'll writeup why in another CPFA note).
Alternatives to the current social services need to be explored. (I'll also have a individual write-ups on many of these)
National defense spending is our largest budget item (as it should be) but it's too big. While the specifics of any plan should be drafted by the military's generals, we need to focus on shrinking our presence in non-war countries. We need to reanalyze which capital investments can be prolonged without catastrophic results. We need to focus on transitioning peace-keeping operations to local governments, and we need to encourage non-essential personnel to move to the reserves and seek jobs in private industry.
A constitutional amendment prohibiting deficit spending without a 2/3 majority needs to be put in place. Our national debt has climbed to the size of our economy. We can't hope to fix it unless we stop making the problem worse. As long as politicians can garner support by spending money we don't have, they will.
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