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Recessions and the National Debt Essay

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Recessions and the National Debt

Introduction

Every government aims at delivering the best services and policies to its citizens. Most governments, both the developed and the developing ones, strive to provide various programs through careful allocation of available resources in their national budgets. Taxation remains a major source of revenue for almost every political administration. However, the available revenues are not always enough to sustain the various programs that a government may intend to provide to its citizens, and this shortfall stimulates administrations to seek for government borrowing from other developed governments and/or the World Bank. Any borrowing requires commitments in order to ensure it is repaid within the agreed duration. However, consecutive borrowing results in an increasing national debt. In the United States, government borrowing is approximately $22.22 trillion as of April 20, 2019 (Yared, 2019). Apparently, it is worth noting that besides the implementation of various government programs such as Medicaid and Medicare, government borrowing may be influenced by unexpected events such as the occurrence of the great economic recession and unexpected foreign wars. During President Obama`s tenure, the national debt increased from US $10 trillion to US$ 20 trillion, and this trend was mostly due to the 2008 financial crisis (Yared, 2019). However, an increase in borrowing has major adverse impacts on the national economy. This paper pays high attention to the analysis of different theoretical views on the national debt, long-run costs of high national debt, and costs of eliminating budget deficits through tax increases and spending cuts.

Different Theoretical Views on the National Debt

Most economists argue that national debt is sometimes relevant when used to fund important investments. For example, when the United States is fighting unavoidable wars and during a recession, government borrowing helps in stimulating or maintaining the economy at these harsh times. Moreover, the American government can use a borrowing to fund a project such as the modern railway or a port, which in the long run will generate revenues for the government. Precisely, the revenues generated from these development projects can be used to service the borrowing for the agreed period, after which the American government will end up getting the revenues for the rest of the period that a target project will remain operational (Keynes, 2018).

According to the former advisor to Senator Bernie Sanders, economist Stephanie Kelton, the national debt is not a national crisis but having more than 12 percent of children in the U.S. living in abstract poverty is a national crisis[S1]  (Yared, 2019). Additionally, the Modern Monetary Theory, one of the emerging school of thought, argues that inflation is just a hindrance that stands along the way of the government creating and spending money for the betterment of its citizens[S2]  (Yared, 2019). Moreover, the national debt is different from the household budget since the government print its money and formulate a theoretically infinite life span of paying its obligations.

Long-run Costs of High National Debt

There are numerous long-run costs that are associated with increased national debts. Increased national debts contribute to drawing of funds from the private sector and investments. It is worth noting that the private sector is among the major stakeholders in as far as enhancing economic growth is concerned. The private sector creates employment to citizens, and through their participation in the economic activities, private firms contribute to the generation of taxes, which is a major source of government revenues. When the government debt is high, large amounts of money are drawn from the private sector and used to pay out the debt. In the long run, a significant amount of money of citizens that is used in buying government securities becomes unavailable to finance various private investments[S3]  (Peterson Foundation, 2019). This means that the amount of money that the government allocates to the private sector in order to facilitate business investments becomes no longer available.

Additionally, when the government debt is high, it contributes to reduced output and capital stock, and hence lower incomes. Additionally, increased government debt results in high-interest rates, and this increases the repayment money. According to the Congressional Budget Office (CBO), the interest costs are estimated to be approximately $7 trillion in the next decade (Peterson Foundation, 2019). Unfortunately, this will be the third largest program in the American budget, and if the trend continues, interest costs will be the single largest program by 2048 (Peterson Foundation, 2019). In the long run, the government is left with limited options regarding how it would raise money for repaying the debt. Precisely, the government has to increase taxes and minimize its spending on public services and benefits. The major victims of this move are the citizens

Cost of Eliminating the Budget Deficit

There are numerous costs that are linked to eliminating the budget deficit through increasing personal tax and cutting government spending including decreasing the transfer payments such as Medicare, Social Security, and Medicaid and discretionary spending such as education and defense budgets. Reducing budget deficit through increasing personal taxes contributes to a deflation of the economy. The negative impact with a deflation of the economy is that it results in increased levels of unemployment and diminished economic growth. When the government opts to cut spending by reducing the amount of funds that it provides as transfer payments, the aggregate demand in the economy is reduced. This means that a majority of Americans will not be able to access various basic services, such as social security, Medicaid, and Medicare (Feldstein, 2016). It is worth noting that reducing government spending on services like social security would contribute to lower productivity. Additionally, cutting spending on Medicaid and Medicare programs will make it impossible for most individuals to afford to pay these programs.

Considering that health is one of the most fundamental aspects of economic growth, the majority of individuals will not manage to access quality health care services. This means that most individuals will end up staying at home when they are unwell, seeking health care services, rather than attending to their daily economic activities. In the long run, the economy of the country will be negatively affected. Moreover, education and defense are basic government investments (Champ & Freeman, 2001). If the government cuts down spending on these services, it will contribute to increased levels of insecurity, which will discourage local and foreign investors from implementing their investment decisions in the country. Foreign investors bring foreign capital, create more revenues, enhance ways of doing business, and, more importantly, create employment to the locals. If these individuals are discouraged from investing due to high levels of insecurity in the country, it means that all the aforementioned benefits will be foregone. Similarly, increasing personal taxes will result in reduced levels of income for most Americans, and this will leave them with a limited amount of money to invest. In contrast, basic education enhances the knowledge and skills base of the locals, which contributes to higher productivity.

References

Champ, B., & Freeman, S. (2001). Modeling monetary economies. New York, NY:  Wiley.

Feldstein, M. (2016). Dealing with long-term deficits. American Economic Review, 106(5), 35-38.

Keynes, J. M. (2018). The general theory of employment, interest, and money. Internet Resource[S4] .

Peterson Foundation, (2019). The fiscal & economic impact. Peter G. Peterson Foundation. Retrieved from, https://www.pgpf.org/the-fiscal-and-economic-challenge/fiscal-and-economic-impact

Yared, P. (2019). Rising government debt: Causes and solutions for a decades-old trend. Journal of Economic Perspectives, 33(2), 115-40.


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