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The United States government faces mounting debts that crowd out private investing and cost the American tax payer $234 billion this year. The Congressional Budget Office expects the debt to grow to $1. 7 trillion by the end of the year and increase as boomers begin to receive Social Security and Medicare .
While spending wisely through investments in capital raise the nation’s gross domestic product over and reduce unemployment, the practice of running deficits in all phases of the business cycles is problematic because it indicates a structural deficit caused by an inability or unwillingness of the American government to live within its means,3. Economists to measure the national debt because it is an indicator of a nation’s ability to repay its debt use debt-to-GAP ratio, because it compares the amount owed to the amount that the nation produces per year.
While the current debt-to GAP ratio is below the post World War II, it will soon grow drastically as Social Security and Medicare spending increases faster that the GAP. The primary objective of American economic policy should be to grow the economy, increasing the government’s capacity to repay the debt. Unfortunately, the increasing deficits that entitlement spending requires creates a debt that is simply too large to grow completely out of. The GAP has grown sluggishly over the past decade from $9. 76 trillion to $14. Trillion, while the debt has skyrocketed from $5 trillion to $12 trillion. The congressional budget office projects that the national debt to gross domestic product ratio will rise to 82% by 20196. The United States must curb wasteful entitlement spending, while maintaining programs likely to lead to economic growth. Responsible deficit spending can lead to a surplus as it did when Reggae’s military spending laded an important role in ending the cold war, creating the peace dividend, as the defense budget was reduced due to the absence of the Soviet threat.
While economists disagree on how much debt is sustainable, the entitlements will drive the debt to GAP level to a level that would raise interest rates for businesses, and require high interest payments on debt. Entitlement spending, especially Security and Medicare may push debt to GAP ratio to unmanageable ratios. Because entitlement spending is promised through legislation, it cannot be adjusted based on the fiscal situation of our country.
The lams of the head of the Office of Management and Budget that intra-government debts owed from the Treasury to the Social Security Administration are insignificant untrue because these debts will have to be paid out in the form of entitlement spending, as the boomers gage. According to Heritage foundation projections, if lawmakers do not alter entitlements such as Social Security and Medicare, the debt to GAP ratio with 292% by 2050 and 810% by 20808. AS the debt-to-GAP ratio increases, the interest payments on the debt will continue to increase.
So far, these interest payments have been moderated by low interest rates, but these interest dates will soon rise. As the market rebounds, demand for treasury bonds favored during uncertain times will fall as investors’ appetite for risk restricts. In addition to the rising popularity of other securities, investors may soon fear that the US government will inflate the debt away and not regard treasury bonds as secure investors, forcing the US to pay even higher interest rates. Even if the budget deficits shrink as predicted by the Whitehorse, the interest on the national debt will increase to $700 billion in 20199.
Curbing entitlements will be difficult as politicians have an incentive to keep constituents satisfied by continuing to fund programs that benefit their constituents, even if it has negative long-term repercussions on the economy. Despite the drastic problem of excessive spending, the government cannot cut important programs carelessly, as a sudden decrease in government spending could plunge the nation into recession as German’s research shows that Rooster’s cut in new deal programs, such as the Works Projects Administration in the late asses led to recession.
In addition to the high cost of servicing the debt annually, economists Yarrow and Rogers argue that the debt will crowd out investment by raising interest rates 1 . They argue that the increase in demand for loans caused by a high national debt causes interest rates to increase, making it difficult for private firms to borrow money to invest in capital. The resulting decrease in investment by private companies is alarming because capital deepening, the process of increasing the amount of capital per worker, thus increasing productivity is key to a nation’s economic growth.
While Harvard economist Robert Barrow’s found that the overall debt to GAP ratios of 12 industrialized nations have a greater effect on interest rates than any one nation’s debt to GAP ratio,an increase of the debt to GAP ratio of 1% leads to a . 05% short- term interest rate increase and a . 35% long-term interest rate increase, interest rates are affected by a multitude of factors, so the absence of a correlation does not necessarily indicate the absence of causations 2.
Inflating the debt away, by printing more money in lessen the value of the debt is not a realistic option because it does nothing to lessen the liability for entitlement promised to seniors and compromises the government’s ability to borrow more none. If the U. S government simply prints more money, this will also raise the costs of government entitlements such as welfare, Medicare and Medicaid. In addition, inflating away the debt will make creditors wary to loan money to the United States, as nations will fear that the American government will inflate away the debt.
In addition to affecting the government’s ability to finance deficits, inflating the debt away will render businesses unable to borrow money to invest as investors fear inflation will cause a capital loss if it is greater than the interest. The affected redirectors involve not only large organizations, but many Americans who save money through investments. Defaulting on the national debt is not a realistic option because it would result in financial and political chaos.
As much of our debt is owned by foreign nations, retaliation by creditors such as China may include nationalization of US firms, along with making it virtually impossible for the US to receive credit in the future. As the debt is spread out over many countries, relationships with much of the world would suffer. It is likely and the US would be seen as the perpetrator of the biggest heist in story. The only effective way to manage the national debt is to curb entitlement spending, while continuing to grow the economy.
Investments in human capital such as the stimulus package’s tuition tax benefits will raise the nation’s GAP, thus increasing the capacity to service and eventually repay the national debt, while programs that require spending with no end in sight will cause fiscal disaster. The drastic cut in entitlement spending requires politicians to reduce spending on programs that many of their constituents depend on such as Social Security.