While some economists and politicians may argue that cultural factors, such as the American predilection for spending, are responsible for America's anemic rate of investment, the evidence suggests that the real culprit is the budget deficit.
In general, investment varies inversely with the interest rate. The higher the interest rate, the more expensive it is for companies to borrow money and invest, therefore, as the interest rate rises investment decreases. The budget deficit drives up the interest rate because as the government tries to borrow more and more money it increases demand in the loanable funds market. Since an increase in demand with no change in supply always causes the price of a good to rise, the increase in demand for loanable funds will produce a higher interest rate which leads to less investment.
Yet not only does the budget deficit drive down investment, it also creates a trade deficit. Since the budget deficit in recent years has been so large, it has routinely eaten up an enormous proportion of domestic savings. The savings left over generally cannot meet the demands for domestic investment so America must import foreign capital to make up the difference.
One general rule of foreign trade is that net capital outflows must match the trade balance. Since the United States, due to its huge budget deficit, must import capital, it must also run a trade deficit to balance the other side of the equation. The result has been a steadily increasing trade deficit for much of the past two decades.
In the end, these economic consequences of the budget deficit lead to less economic growth and more wage stagnation. The result is a weaker and poorer America filled with citizens battling over a steadily shrinking economic pie. Perhaps in such an economic climate the Democratic party would thrive given its ability to cater to special interest groups.
In contrast, America would slip into economic decline, joining Great Britain in the dust-bin of history, two has-been nations destroyed by the foolish economic policies of the Left.
The United States can still avoid this fate. But to do so the American public must band together and commit itself to balancing the budget and to saving America.
If all of us sacrifice a fraction of the many benefits we each receive from the federal government, then we can balance the budget. But we must all be willing to make that sacrifice for the good to the country.
Imperfect, the debate over the balanced budget serves as one of the great tests of America's national spirit. In the past we have always passed these tests. When Great Britain sought to impose taxation without representation on the 13 colonies thousands of men came forward to help carve out a new nation committed to freedom and democracy.
When the Union needed men to save America, hundreds of thousands volunteered to risk life and limb for the good of the nation. While perhaps the issue of the balanced budget lacks the drama of these earlier tests, it is a test that we must pass as a nation. We must do so for the sake of not only ourselves but for the sake of future generations of Americans.