National Debt

National Debt

The US’ national debt is rising at an alarming rate. As illustrated below, the debt has been increasing steadily since the 1990s to 2019.[1] The US, as the chart depicts, has been borrowing billions to fund its economy and prevent market failure. The figure is expected to grow in the future, with devastating impacts on economic health. The National debt should be addressed given the long-term effects, such as the fiscal crisis, which outweigh the short-term gains.

Chart 1: Rising National Debt since 1990-2019. (Graph by Statista. In Public debt of the United States from 1990 to 2019. Statista, 2019, https://www.statista.com/statistics/187867/public-debt-of-the-united-states-since-1990/).

Policy Makers and Reducing National Debt

Policymakers should work to reduce national debt for various reasons. Firstly, a high national debt will reduce household income. The surging interest costs associated with the debt will hike the interest payments to foreign debt holders, reducing economic output.[2] In addition, investors will prefer purchasing government debt instead of private development. Without investment, there will be less worker productivity and unemployment. A fiscal crisis will also occur when the investors lose confidence in the US economy because of the high interest rate on federal debt.[3] Higher inflation rates are inevitable, reducing public and private market activity in international markets. As shown in the chart below, the GDP will be used increasingly to pay federal debt instead of being used for national programs.[4] As the interest increases, the debt payment also rises. The interest rate’s percentage in the GDP will climb to 6%, competing with Social Security. Consequently, it would impact different government programs.

Chart 2: Surging debt interest rate. (Graph by Budgets and Projections. In Why Should We Worry About the National Debt?. Committee for a Responsible Federal Budget, 2019, https://www.crfb.org/papers/why-should-we-worry-about-national-debt)

Impacts of Debt Load

 Short-Term Impacts

Economic growth is a short-term gain. The US government obtains funds to fuel economic growth. Government borrowing upholds the principle of the cost of something being what is given up to acquire it. The US accepts a financial burden for a better economy. Consequently, the government can guarantee employment, labor productivity, and better wages for its citizens, which raises living standards.[5] The GDP also rises because of high production. People also have avenues to invest, boosting their income. The outcome supports the principle that the standard of living depends on a country’s production. Overall, the debt load stimulates economic growth.

Equally, foreign investors increase. Public debt is an appealing option for foreigners to invest in the USA as it is better than foreign direct investment (FDI) or stock market.[6] Risk-averse investors will inject their capital in the country because of the government’s assurance that they will have a return on their investment.

Long Term Effects

Private investment will reduce in the long-run. Because the federal government borrows from people, investors, and businesses, private investment will decline.[7] In effect, capital goods will diminish, and workers will have little capital to expand their jobs. In turn, the country will experience cases of unemployment, low productivity, and less compensation.

A sudden fiscal crisis is probable because of the debt load. The unexpected financial crisis results from a loss of confidence in the government’s ability to manage the budget. Loss of confidence also means unfavorable interest rates, prompting the loss of confidence by investors.[8] Without investor confidence, the economy would perform poorly. Furthermore, the treasury rates will suddenly rise and lower the market value of outstanding market securities, causing losses. The fiscal crises will also affect mutual funds, pension funds, insurance companies, and banks.

Similarly, the government would be inflexible in responding to emergencies. The government will struggle to respond to emergencies, such as recession and war, and promote economic activities.[9] The debt would also force the government to reduce spending on national security or change policies.

Role of Fiscal and Monetary policy For Long-Term Sustainable Economic Growth

Fiscal policies help reduce the budget deficit. The federal debt is already high, threatening the revenue of the country.[10] Given that, fiscal policies minimize public spending and raise tax rates for higher revenue. In effect, the existing deficit will reduce.

Moreover, lowering interest rates stimulates economic growth. People respond to incentives, and low interest rates appeal to the public.[11] When the public has access to finances, they spend it on goods and services and invest in different sectors, creating employment. With time, the US’ borrowing to avail services to the citizens will gradually decline.

Budget cuts are also integral in controlling the national debt. Budget cuts limit how much money is spent on different government programs.[12] Although budget cuts are controversial, they limit government borrowing. However, the principle that people face tradeoffs should be emphasized to the public.

Conclusion

The government should address the national debt given its long-term consequences, such as the fiscal crisis, which outweigh the short-term gains. Although the debt creates investment and raises living standards, the economy suffers in the long-term. Investment, unemployment, and productivity are illustrations of the debt crisis. In effect, monetary and fiscal strategies ensure that government spending is checked without jeopardizing economic prosperity.

Bibliography

“In Why Should We Worry About the National Debt?”. Budgets and Projections. Committee for a Responsible Federal Budget. 2019. https://www.crfb.org/papers/why-should-we-worry-about-national-debt

“Public debt of the United States from 1990 to 2019.” Statista. 2019. https://www.statista.com/statistics/187867/public-debt-of-the-united-states-since-1990/

Amadeo, Kimberly. (2019). “Public Debt With Its Pros and Cons.” The Balance, 2019. https://www.thebalance.com/what-is-the-public-debt-3306294

Pavleska. “10 Principles of Economics.” Macewan University, 2018/2019. https://www.studocu.com/en/document/macewan-university/introduction-to-microeconomics/lecture-notes/10-principles-of-economics/2906130/view

Schmidt, Michael. “A Look at Fiscal and Monetary Policy.” Investopedia, 2018 Retrieved from https://www.investopedia.com/articles/economics/12/fiscal-or-monetary-policy.asp

The 2019 long-term budget outlook. Congress Of The United State Congressional Budget Office. 2019.

[1] “Public debt of the United States from 1990 to 2019,” Statista, 2019, https://www.statista.com/statistics/187867/public-debt-of-the-united-states-since-1990/

[2]   The 2019 long-term budget outlook. (Congress Of The United State Congressional Budget Office, 2019)

[3] Ibid.

[4]   “Why Should We Worry About the National Debt?,” Committee for a Responsible Federal Budget, 2019, https://www.crfb.org/papers/why-should-we-worry-about-national-debt

[5] Kimberly Amadeo, “Public Debt With Its Pros and Cons,” The Balance, https://www.thebalance.com/what-is-the-public-debt-3306294

[6] Ibid.

[7] “Why Should We Worry About the National Debt?,” Committee for a Responsible Federal Budget, 2019, https://www.crfb.org/papers/why-should-we-worry-about-national-debt

[8] The 2019 long-term budget outlook. (Congress Of The United State Congressional Budget Office, 2019)

[9] Ibid

[10] Michael Schmidt, “A Look at Fiscal and Monetary Policy,” Investopedia, 2018, https://www.investopedia.com/articles/economics/12/fiscal-or-monetary-policy.asp

[11] Pavleska, “10 Principles of Economics,” Macewan University, 2018/2019, https://www.studocu.com/en/document/macewan-university/introduction-to-microeconomics/lecture-notes/10-principles-of-economics/2906130/view

[12] Michael Schmidt, “A Look at Fiscal and Monetary Policy,” Investopedia, 2018, https://www.investopedia.com/articles/economics/12/fiscal-or-monetary-policy.asp