American debt

The US Government Debt: Consequences, Causes, and Solutions

The national debt is generally determined by government borrowing and taxes. Government revenues or taxes, for example, decrease the national debt, while all federal spending raises the debt. Many analysts have attempted to study the developments in the US national debt by investigating the holders of the federal debt as well as the measures placed in motion to combat the threat. The essay “The US Government Debt: Consequences, Causes, and Solutions” is used to discuss the US government debt in this report.

The Three Major Problems around the US Government Debt and Budget Deficit

The essay delves into the three major problems around the US government debt and budget deficit – triggers, implications, and remedies. According to Xu et al., the US debt is currently unsustainable as the federal government spends more than 20 percent of the country’s Gross Domestic Product (GDP). The current expenditure is higher than in the previous economic times (an average of about 9 percent) thereby fueling the historical debt levels (Xu et al. 69). The authors maintain that the US debt has been on the rise and is likely to worsen in the future if the federal government fails to curb it. For instance, in 2013 the debt increased to 102 percent (debt expressed as a percentage of GDP) – a tremendous change compared to 2007, which was marked at 65 percent. Also, the Congressional Budget Office projects the federal debt to rise to 300 percent in the future (Xu et al. 69).

Analysis of the Economic Principles Discussed

The first economic principle touches on how the government raises revenue through the sale of securities. States use either two ways to finance the deficits - selling both foreign and domestic securities to the public (bond-financed deficits) or selling securities to Federal Reserve (money-financed deficits). In either case, vicious cycles are created thus triggering government debt and deficit to increase further. Bond-financed deficits are a subject to little private investment and high inflation since it stimulates the demand for money and consumption. Similarly, money-financed deficits result in increased aggregate demand, high prices, and high-interest rates. Therefore, the overall effect is inflationary (Xu et al. 72).

Rising national debt has negative impacts on the economic growth, response to emergencies, and the expenditure in certain sectors of the economy. In most cases, savings are channeled to government debt purchases rather than investments in capital goods and essential programs such as infrastructure development are deprived of the adequate resources. Further, the nation has little or no capacity to handle cases of economic recessions, among other emergencies.

The other economic principle explores the ratio of mandatory and discretionary federal spending to tax revenue. The federal discretionary spending is only one-third while the rest is mandatory. The US has experienced a tremendous increase in mandatory spending, which cannot be modified by the Congress like in the case of discretionary spending – the reason being mandatory spending is meant to bring benefits to the citizens and include Medicaid, Medicare, and Social Security. The payouts for such programs are likely to exceed the revenue in the future and push the country to borrow or look for other tax sources. Therefore, the trend above has to be reversed to reduce Federal debt or the budget deficit.

Lastly, the shifts in macroeconomic policies in a country lead to an increase in national debt. For instance, the tax cut reduced revenue growth in the US while the military buildup increased Federal outlays in 1981 (Xu et al. 74). The situation was made worse by further shifts involving fall in home prices, mortgage crisis, and failures in investment banks. The increase of money supply in such cases is likely to cause more instability in national debt. For instance, the US government committed over $ 10 trillion to curb the situation only to make it worse (Xu et al. 74).

Conclusion

The rising US debt is a big concern, and the federal government is obliged to look for strategic measures to reverse the trend. The current situation has negative implications on the overall economy and may worsen in the future as projected by different institutions or bodies in the region. Therefore, the government has to select keenly on the suitable policies in handling the ever rising debt.

Work Cited

Xu, Min, Suk Hi Kim, and Hassan Moussawi. “The US Government Debt: Consequences, Causes, and Solutions.” The Journal of Applied Business and Economics 18.1 (2016): 69.