Small Matters: U.S. debt hurts small business, and all of us

The debate over the debt ceiling and the size of the federal budget deficit has put the spotlight on the "error of our ways" - trying to live beyond our means today at the expense of our future.

The federal government has developed the bad habit of spending more than it is willing to ask us to pay for with taxes. We get all those "goodies," but don't have to pay for them with higher taxes. Instead, the government borrows the money, to be repaid some time in the future.

Assume for the moment that there is no "rest of the world," it's just us. Then, a simple truth is obvious: If the government spends $1,000 and only taxes us $600, it must borrow $400. But it must borrow the $400 from us. When we lend money to the government (through buying government bonds), we can't spend it. So, either way, the government has $1,000 to spend and we have $1,000 less to spend.

Total spending in our economy is the same, it's just a question of who spends the money, us or the government. This is a political question that we try to answer at each election. If I get an extra dollar, do I want to buy what private firms make or what the government makes?

A second important truth: If we don't save some of our money and put it in the "bank" (this includes insurance companies, stock brokers, and all that), then there is no money to be borrowed to "invest" in productive assets (finance the purchase of a new car or house or expand a business and hire new workers).

In 2007, consumers saved only about 1 percent of their after-tax income, a poor performance. It was 10 percent in the 1970s and early 1980s. Chinese consumers save 40 percent.

Small businesses get more than 90 percent of their operating funds from banks, which must depend on savers for the money to lend into the community.

If the government runs a $400 deficit and borrows the money by selling Treasury bonds to us, it reduces the amount of money available to finance investment. Since the Treasury will pay any interest rate it must in order to borrow what it needs (Why not? We pay it in taxes), private borrowers, who are sensitive to interest rates, will get whatever is left.

Bad sign: Low rates