Political Science Paper on The U.S. Federal Debt
The U.S. has the largest debt in the world (Feldstein 53). The European Union follows it closely, which is far much better since the union is comprised of 28 countries, unlike the United States that is a single country. Currently, the U.S. debt stands at $19.9 trillion (Feldstein 53). This comprises the total dues owed by the national government. While three-quarters of this debt are held by the public, the other quarter is intragovernmental debt (Feldstein 54). The federal government owes the debt to foreign countries, corporations as well as individuals who buy U.S. bonds, notes, and Treasury bills. Intragovernmental debt is owed to the U.S. departments dealing in account securities for the federal government. These include Social Security and trust funds. This is worrying since the debt is greater than the GDP of the country. It is believed that the debt will reach a danger zone if the current trend will be continued.
How the Debt Gets so Large?
The increase in the federal debt is caused by three factors. One of the factors is the accumulation of national budget deficits. Here, the rise in debt is contributed to the introduction of new programs as well as tax cuts ((Feldstein 56). The U.S. has realized the largest deficit during the reign of President Obama. During this time, ARRA impetus package was introduced along with Obama tax cut and military spending which was $ 800 billion annually. This explains why the national debt has increased exponentially compared to GDP from the years 2010 to 2016.
In 2010, the federal debt was $ 13.5 trillion that was 90% of GDP following Obama Stimulus Act of $400 billion. In 2011, the debt rose to $14.7 trillion (95% of the GDP). The Great Recession occurred in 2012 when the federal debt reached $16 trillion. This was the period when tax cuts reduced revenue a great deal. In 2013, the federal debt was $16.7 trillion corresponding to 100% of the country’s GDP (Feldstein 58) Between 2014, 2015, and 2016, there was a WoT cost of $309 billion and tough dollar hurt exports. These led to an increase in debt from $17.8 trillion to $18.1 trillion and $ 19.5 trillion respectively. The second largest deficit in America was during the reign of President Bush as he responded to the War on Terror. Also, President Reagan experienced a deficit as he expanded Medicare.
Social Security Trust Fund has been the major source of lending for every president. This is another reason why federal debts increases. These funds use more revenue than is required instead of investing this money into future spending when boomers retire. The third reason why U.S. debt keeps increasing is due to the activity of the buyers of the U.S securities (Feldstein 59). Treasuries including China and Japan always make sure that their currencies are lower compared to the USdollar so that America would continue importing goods from their countries.
The fourth reason is that the national government accrues some benefits from low rates of interests. Low interest rates help the government in running budget deficits, and this explains why some people believe that America has ‘financial muscles’ to pay its debts (Feldstein 59). The last factor contributing to debt increase in America is the tendency of raising the debt ceiling by the Congress. The failure of the Congress to adhere to the set limit on debt puts America into more and more debts.
How Federal Debts Affect the Economy
The immediate impacts of huge debts are the benefits accrued from deficit spending. Economic growth is realized, whereby the federal government purchases state of art defense equipment, improving health care as well as invests heavily in construction (Feldstein 61). In addition, the federal government contracts new employees from private corporations who in turn spend their income on gasoline, clothing, and foodstuffs. This is a positive impact on the economy. On the other hand, the long-term negative effects are immense.
Huge debts increase the GDP ratio prompting the debt owners to demand higher interest payments. They seek compensation as a result of increasing risks. This, in turn, shrinks the demand for America’s securities, which leads to increased interest rates and eventually to a sluggish economy (Feldstein 61). The diminished demand for securities reduces the value of the dollar, since its value is directly proportional to the demand of Treasury papers. A decrease in dollar value lowers the value of the currencies the foreign holders get paid. Thus, the latter will prefer investing in their home countries.
An increase in federal debt increases the debt burden on every American citizen. The public experiences lower incomes as well as higher unemployment. Another negative impact is endangering stability of healthcare and social security (Feldstein 62). In spite of that, the federal debt impacts the future generation, which will be required to settle the debt. Unfortunately, these detrimental effects are long term and pose a threat to national security. Huge debts increase vulnerability to economic crisis thus weakening the American country.
Solutions to the Debt Crisis
The best way to get out of huge federal debts is through reduction of spending and increasing taxes at an equal proportion. The federal government should pay more attention to spending and taxes since each of them will moderate the discrepancy correspondingly. However, spending and taxes have differently impacts on the economy and employment (Feldstein 64). For instance, cuts in income tax fuel demand by ensuring that the consumer gets more money. This boosts the economy since the more money the consumer gets, the more they are spending or take to the bank. The overall result is the creation of jobs as companies increase their productions to meet rising consumer demands.
In addition, cuts in payroll tax are the other best method of creating jobs. The CBO establishes that 13 jobs are created in every payroll tax cut of $1 million. This is because some businesses increase wages to their employees to retain them. Moreover, the employees spend more money leading to increasing demand (Feldstein 65). Other companies employ more workers, whereas others spend more on other assets since they gain from the tax savings. Nevertheless, the federal government should ensure that the principle of transparency is observed as far as debt reduction measures are undertaken. This will greatly improve confidence in organizations.
The federal government should also embrace the delay and change strategy for one year to recover from huge debts. This provides ample time for complete recovery of the economy (Feldstein 67). It also provides the economy with an opportunity to grow at least three to four percent which is the required threshold to the creation of job opportunities as well as eradicating unemployment. The debt crisis will eventually be mitigated through a combination of tax raise and spending cuts along with high GDP increase. The result will be a low debt to GDP ratio.
Feldstein, Martin S. Preventing a National Debt Explosion. Cambridge, Mass: National Bureau of Economic Research, 2010.