Causes of the US National Debt

1704 words (7 pages) Essay in Economics

14/02/19 Economics Reference this

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How big is the US National Debt and history?

By definition, the amount of money owed by the federal government to creditors is referred to as the US National Debt. The National debt is categorized into two; public debts and government. Government debts are always on the rise due to the increase in government spending and expenditure, unpaid credits by debtors, decreased taxes among others (Zezza, 2014). The US National Debt has a historical increment due to the rise in debt as a share of the GDP during the recession periods and times of war. A combination of inflation and growth of GDP results in decreased national debt. The national debt of the US, for instance, increased after the World War II to 113 % in the year 1945 (Zezza, 2014). However, this figure later went down in the subsequent thirty-five years. In the past few decades, there have been concerns of how sustainable the fiscal policies of the US National government are based on the rise in costs of medication and the growing number of old people in the US population (Zezza, 2014). According to Sakbani (2013), the public debt of the US was at $ 14.3 trillion of the overall GDP while the inter-governmental debts were $5.4 trillion. This totals to about 10.6% of the 2015 GDP. Sakbani (2013) further notes that more than 45 % of the US national debt in 2016 was by foreign investors with Japan and China in the lead.

Precisely, an analysis of the US national debt reveals that the debt has had a constructive decline since the year 1789 apart from between 1835 and 1836 (Chorafas, 2014). The debt was at the highest level during the first term presidency of Harry Truman which was during and after the Second World War.  After the second world war, there was a notable fall in the national debt in the US. The US national debt was at its lowest point in 1974 under the leadership of Richard Nixon (Sakbani, 2013). However, after 1974, the national debt started appreciating and this has been the trend since then. But it stagnated during Bill Clinton and Jimmy Carter’s presidency. In the 1980s there was a tremendous increase in national debt due to Ronald Reagan’s decision to lower taxes and increase military expenditures. However, in the 1990s the debt went down when a reverse of the 1980s was implemented; increased taxes, and lower military spending. Chorafas (2014) highlights that due to the financial crisis between 2007 and 2008 the public debt went extremely high.

There seems to be a surge in national debt during the GW Bush and Obama administrations. Why?

There was a considerable rise in national debt between the presidency of George Bush and that of Barrack Obama. This was from $ 5.768 trillion when Bush left office to $ 14.071 trillion 735 days after Obama took office (Skidmore, 2011). This means that the recording of Bush’s national debt was wrong. This is because in his term as the president there was a rise of $ 607 billion yearly hence the overall figure could not be $ 5.768 trillion as indicated in the Treasury records. Skidmore (2011) further explains that during Obama’s era the national debt considerably went high by an average of $ 1.723 trillion yearly. This saw the figure go way up above the debt during Bush’s presidency. However, it is not possible to hold Obama responsible for this increase in debt. This is because the figures flow from the 2009’s budget which Obama never signed. This means that if the right account to Obama’s accounts are to be analyzed this should trail down from the fiscal year 2010 and 2011 (Sakbani, 2013). In addition to a sum of $ 225 trillion that was included in the 2009 budget under his signature.

A close comparison of Obama’s and Bush’s spending and deficit reveal that Bush was way far than Obama based on managing of the national debt. This argument can be supported by; Bush operated a total budget of 3.283 trillion in deficit spending for his eight fiscal years in office. On the other hand, Obama operated at a spending deficit of $ 2.826 trillion within his first two years in office. This means that while Bush operated at a deficit of $410 billion per annum, Obama operates at more than $1.4 trillion per annum, giving a difference of more than 1 trillion between the two reigns. This analysis explains the current surge between Obama’s presidency and Bush’s presidency regarding deficit spending.

What are the consequences of a large national debt? Is it going to hamper the economic growth as some have claimed?

Based on an economic perspective, large national debt affects the economic growth negatively. It is almost impossible for a government or country rather to sustaining a large and growing national debt. Some of the effects come from the side of investors who begin doubting the possibility of the federal government to continue servicing the economy and government spending (Boubekar et al., 2016). There are three major effects of large national debts on a country’s economic growth. First, large debt draws money away from national investments which would earn then government some revenues. This is due to lack of enough money for the government to service effective investments. This would mean that the government is heavily spending, but there are minimal or no revenues being generated hence lack of capital to be reinvested. There will be no growth in the country’s economy. Secondly, large debts negatively influence taxation and spending by the government. This is because when the country is suffering from high national debts, all the attention are focused on what the government can do to continue sustaining itself. This is where the government adjusts. As Boubaker et al. (2016) put it when taxation is high workers and investors are negatively affected by tax increment and can be left with little or no money to reinvest. Also, the tax increment leads to economic downturn from the side of the policymakers and investors. Policymakers find it challenging designing policies on tax spending in an environment where there is an extremely high national debt. The economic growth is normally hard in such a situation based on the fact that there are no sufficient funds to fund any new challenges that arise along the policy-making and policy implementation processes.

Is it possible for the US to default on its debt in future? Explain

The United States does not have any record of ever defaulting on national debt. If this ever happens the results can be unimaginable. However, there have been cases when the House Republicans have resisted raising the house ceilings urging the Congress house to cut on spending first (Johnson, 2000). It means that there are possibilities of the US failing to honor their national debt shortly. Precisely, the US can default their national debt in two main ways; failure of the Congress to raise the debt ceiling, and is the Government decides that the interests they are charged are way too high and resolve to not paying interests on bond, notes, and Treasury bills. In the first case scenario, failure by the Congress to raise the debt ceiling would mean high interests rate on Treasuries, hence high costs on the consumer loan, mortgages, and other such services (Johnson, 2000).This will then lead to decline in the value of a dollar and finally inability of the government to pay salaries and benefits to their civil servants and retirees. On the other hand, in the second scenario, there would be a disaster as the value of treasuries in all the government’s secondary markets would stagnate or go down hence Treasuries would be sold at discounted prices (Cline, 2013). The government would find it hard to auction their treasuries hence making it hard for them to borrow money and pay bills. The default of US national debt would be extremely disastrous owing to the confidence most investors have on the US markets.

Why the Nobel winning economist Paul Krugman is not as alarmed as many others are concerning the high level of US National debt?

It is important to note that the overall national debt is usually a combination of all loans acquired by the federal government from various creditors to finance a deficit budget. In taking and utilizing loans, the government usually has a focus on increasing their tax rates for them to finance their current government spending (Zezza, 2014). Paul Kraugman can be said to be less alarmed on the high level of the US national debt due to his argument that there is no need for investors or anybody else to worry about the level of the impeding national debt of the US. In his argument, Kraugman makes several assumptions. Unlike others, Krugman argues that in as much as debt matters there are other things that matter most and that the government needs to spend more to get the US citizens out of the current unemployment trap (Zezza, 2014). This shows that he had no idea what harm the current high national debt has caused the US and the impacts a further increase in government spending will cause the US.

References

Boubaker, S., Rouatbi, W., & Saffar, W. (2016). The Role of multiple large shareholders in the choice of debt source. Financial Management, 46(1), 241-387. Doi: 10. 1111/fima. 12148

Chorafas, D. N. (2014). Kingdoms of Debt Public Debt Dynamics of Europe and the US, 24-32. DOI: 10. 1016/b978-0-12-420021-0.00002-6

Cline, W. R. (2013). The multiplier, sovereign default Risk, and the US budget: An overview. Public Debt, Global Governance and Economics Dynamism, 276-29. Doi: 10.1007/978-88-470-5331-1-3

Johnson, K. (2000). National Missile Defense 2015: An Unintended Consequence. Doi. 10. 21236/ada432647

Sakbani, M. N. (2013). The Dual Debt Problem in the US and in Europe. International Debt. Doi: 10. 1057/9781137030573.0007

Skidmore, D. N. (2011). The Obama Presidency and the US Foreign Policy: Where is the Multilateralism? International Studies Perspectives, 13(1), 46-53. Doi: 10.1111/mj. 1528-3585.2011.00454.x

Zezza, G. (2014). Fiscal and Debt Policies for Sustainable US Growth. Fiscal and Debt Policies for the Future. Doi: 10. 1057/9781137269539.0012

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