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This House would prioritise eliminating the budget deficit over increasing domestic spending
This House would prioritise eliminating the budget deficit over increasing domestic spending
The debt of the United states at the time of writing is approaching $15 Trillion by many measures and growing quickly (8 November 2011). However, that only covers national debt – the government’s debt – if all debts are included the figure increases to a massive $54 trillion. That requires a total annual interest payment of three trillion dollars.
The issue of debt is one that starkly divides decision makers between and within both major parties. National debt is a complicated issue and the United States is in an unusual, possibly unique, position in relation to its debt, as those other nations and institutions to whom the debt is owed simply cannot afford for the most powerful economy in the world to declare bankruptcy. In the case of many nations, their own currencies are pegged to the dollar, in the case of the Federal Reserve it would lose its purpose for existing and its source of revenue.
The reality is that if the US defaults on its debts then the whole world, not just the US, faces a problem. Discussions about bailing countries such as Italy pale into insignificance compared to a problem in the US. Equally from the point of view of the US taxpayer, a sizeable chunk of their taxes is simply going on paying the interest on debts. Indeed governments around the world get into trouble when they end up having to borrow simply to service the debt and thereby create new debt which will, in turn, need to be serviced.
To give this some historical background, the last time the United States was out of debt was during the presidency of Andrew Jackson in the 1830s. What the media refer to as the national debt is the government budget deficit – the national equivalent of the overdraft on a current account. The difference is thinking you’re out of debt because you’ve paid of the overdraft but ignoring the mortgage, the credit cards, the loan on the car and student loans. Clinton paid off the overdraft, Jackson bought the house back; they’re two quite different accomplishments.
Although this debate will focus on paying off the deficit (the overdraft) the other figures are given by way of context. At the time of writing the US Government deficit is running at about $1,300bn ($1.3tn) and has averaged around there in recent years and is predicted to stay at that level for the next few years. This means that, roughly, the government is spending about 10% more than it earns. It doesn’t take into account, for example, that the government owes pension payments that it hasn’t even started paying out but has received payments from workers who will want to collect it at some point in the future.
|Points For||Points Against|
|Governments need to live within their means||Nobody is going to risk financial instability in the US by calling in the principle sum on the loans that it has taken out|
|Paying off national debt via austerity measures would free-up money used for interest payments||A recession is not the point at whcih debts should be paid back. The state should focus on job creation strategies|
|Many of the reasons for operating a debt have now been eliminated||The US should focus on divising ways in which to pay the medicare and medicaid bills faced by its population|
Remember to choose a winning argument!
Governments need to live within their means
Ultimately the US Government has to pay its bill just like everyone else. Ultimately maintaining a permanent deficit harms the economy creating both inflationary pressures and effecting interest rates.
However, these pressures are not the main source of concern. Although deficits in times of plenty are a grave concern, during a recession most economist agree that deficits may be necessary. However, the US is no longer ‘mostly in debt to itself’ as has been the case in the past.[i]
Increasingly, its debt is owned by the major Asian economies; especially China. The implications should conflict arise between the two are severe as China, effectively has the capacity to bankrupt the US and the dollar at a time of its own choosing.
It is incredibly unlikely that China would ever call in its debts as any damage done to the dollar would be fairly insignificant compared to the impact on China’s own economy and currency.
America can afford to service its debts and doing so is a major stimulus to the global economy. Nobody has an interest in breaking the dollar, as doing so would cause a run on every bank in the world – including the Bank of China. China holds reserves roughly equivalent to M1 – cash in circulation in the US (although it’s worth nothing this represents about four percent of the actual dollars in the world) and so a massive release of dollar-denominated assets would hurt the dollar greatly. The results would see the price of oil, and most other commodities, skyrocket as they are priced in dollars and would bring the entire global financial system to a halt. China has no interest in either of these things happening.Improve this
Paying off national debt via austerity measures would free-up money used for interest payments
The first of the baby boomers start retiring in 2011 and, as a result, qualify for Medicare. There are 78 million people in this generation and all of the statistics suggest that they are likely to live significantly longer than previous retiring generations[i]. As a result the US has some very big bills coming in the next few years and a decreasing base of those working and paying tax revenue to pay them.
This is really not the time to be wasting money on interest for deficits built up to support programmes that are unnecessary. Paying down the debt frees up tax revenue for much needed support, both financial and medical, for seniors as they retire.
The single biggest impact the US government, or any government, can have on the economy is what it does with its own money. By creating jobs through public expenditure it stimulates local economies and creates growth.
Proponents of the baby boomer crisis theory also ignore one very significant fact – these people did not cause a financial crisis before they started working in the late sixties. It also seems unlikely that all of them will stop work as life expectancies are now much longer than in the middle of the last century and a majority can be expected to remain economically active.Improve this
Many of the reasons for operating a debt have now been eliminated
At the end of the Clinton presidency the government was running at a healthy surplus following the longest sustained period of growth in US history. Bush Chose to spend that on tax cuts and two extremely expensive wars (the War in Iraq was the mostly costly war, in relative terms, in US history except for WWII). Obama was landed with the problems that Bush created, but has chosen to extend spending rather than control the deficit.As The country is no longer at war, there is no real reason to be running at a deficit.
Alan Greenspan, and many others, have pointed out that the impact of continued deficits is likely to be higher interest rates – at a time when the country can ill afford them – which will hurt the economy.[i]
The only ways to control the deficit, other than stimulating growth and the tax revenues it produces, would be either to cut services or to increase taxes. Both actions would harm the longer term objective of stimulating growth as they both take cash out of the real economy.
By contrast, focusing on domestic spending to restart the economy will produce long term stability; whether through stimulus packages or other methods.
The idea that there is no need to run at a deficit during a time of recession is absurd. In the light of the financial challenges currently faced by the US, but also in the longer term, it is vital that the government has the ability to run its expenses at a deficit to act as a stimulus.
The reality is that it is in the interests of everyone, not just Americans, for the US government to be able to spend relatively freely. Surpluses are nice but they are a luxury the world’s financial engine can rarely afford.Improve this
Nobody is going to risk financial instability in the US by calling in the principle sum on the loans that it has taken out
There really is no problem with the Federal Government running at a deficit virtually permanently – as it has for most of its history. There is no threat of a default as this would require any lender to commit financial suicide as a result.
The deficit allows the most powerful economic actor on earth to act as a stimulus to those in smaller roles. Paying down the debt reduces money supply and, ultimately, contracts the economy. By relying on the savings of nations like China, through bonds and other instruments, the US is furthering its traditional role of being the primary engine of global economic growth.[i]
[i] Rich Millar. “Democrats Rubin, Schwarz Clash on Spending Versus Deficit Cuts”. Bloomberg. 11 June 2007.
This may well have been the case when a AAA credit rating could simply be taken for granted but it is no longer the case. Standard and Poor has down-graded America’s credit rating[i] and China looks set to follow suit[ii].
A lower rating means paying higher interest on government borrowing. This is new territory for the US; an economy that has no experience of anything other than top ratings. Suddenly all that money from China doesn’t look so cheap and the engine of the world economy is running in to trouble. It’s time to stop being reliant on other people’s money.
[i] Robert Peston. “US Loses AAA Credit Rating After S&P Downgrade”. BBC. 6 August 2011.
A recession is not the point at whcih debts should be paid back. The state should focus on job creation strategies
It would be the height of irresponsibility for the US government to even think about giving anything a higher economic priority than the creation of jobs at a time when unemployment is running at 9.1%.
It is essential that the federal government uses its economic muscle to get Americans working again rather than settling fairly obscure points of economic theory.
Taking money out of the system will cost jobs and hurt business, it will also lead to redundancies in the public sector. Ultimately it would be self-defeating. Admittedly, the Bush regime should have been running the economy at a surplus but it didn’t and that is the reality that the current government needs to deal with.Improve this
At some point the US needs to come to terms with its debts and a gradual collapse of confidence in the US’s ability to pay its debts will not help the American economy or anyone else’s. With a declining tax base – both as a result of unemployment and an increasing burden of economic inactivity through retirement, the government will increasingly have to demonstrate that it is ‘good for the money’ rather than just assuming that something will turn up.
Despite hundreds of billions poured into the economy since the start of Obama’s time in office, the economy remains stagnant. As a result it’s time for the government to demonstrate that it can use austerity as well as largesse to solve the problem.Improve this
The US should focus on divising ways in which to pay the medicare and medicaid bills faced by its population
The realities facing the US government are that it has two separate sets of bills to pay. On one hand there are those to central banks and overseas investors. The others are to its own citizens who have been giving the government their tax dollars over the course of a working lifetime on the understanding that they would recoup that money in healthcare and other benefits at a later stage.
The priority has to be domestic expenditure.Improve this
If China moves to recall the trillion dollars or so that they are owed because they no longer trust US debt, or even just to offload it, the effect on the average American would be devastating. The benefits in increased exports would be more than compromised by increased costs for basic goods and services. Inflationary pressures would become severe and interest rates – one of the Fed’s primary tools in fighting the recession – would be forced to rise to combat it.
It simply makes no sense to run the risk of the sort of collapse that would ensue if the government loses the ability to borrow because of a lack of confidence.Improve this
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