Homeworks academic service


The cause and effect of national debt on the citizens and us government

Share Loading the player. The national debt level of the United States has always been a subject of controversy. Unfortunately, the manner in which the debt level is explained to the public is usually pretty obscure. Budget Deficits First, it's important to understand what the difference is between the federal government's annual budget deficit or fiscal deficit and the outstanding federal debt or the national public debt, the official accounting term.

Simply explained, the federal government generates a budget deficit whenever it spends more money than it brings in through income-generating activities such as individual, corporate or excise taxes.

  • Understanding the National Debt Because debt plays such an integral part of economic progress, it must be measured appropriately to convey the long-term impact it presents;
  • It is the total amount of money that the U;
  • When debt is used to fund economic expansion, current and future generations stand to reap the rewards.

In order to operate in this manner, the Treasury Department has to issue treasury billstreasury notes and treasury bonds to compensate for the difference: By issuing these types of securities, the federal government can acquire the cash that it needs to provide governmental services. The federal or national debt is simply the net accumulation of the federal government's annual budget deficits: It is the total amount of money that the U.

To make an analogy, fiscal deficits are the trees, and federal debt is the forest. Government borrowing, for the national debt shortfall, can also be in other forms — issuing other financial securities, or even borrowing from world-level organizations like the World Bank or private financial institutions.

Since it is a borrowing at a governmental or national level, it is termed national debt, government debt, federal debt or public debt. The total amount of money that can be borrowed by the government without further authorization by Congress is known as the total public debt subject to limit.

Any amount to be borrowed above this level has to receive additional approval from the legislative branch. The public debt is calculated daily. After receiving end-of-day reports from about 50 different sources such as Federal Reserve Bank branches regarding the amount of securities sold and redeemed that day, the Treasury calculates the total public debt outstanding, which is released the following morning. It represents the total marketable and non-marketable principal amount of securities outstanding i.

The national debt can only be reduced through five mechanisms: The federal budget process directly deals with taxation and spending levels and can create recommendations for restructuring or possible default.

A Brief History of U. Debt Debt has been a part of this country's operations since its beginning. Since then, the debt has been fueled over the centuries by more war, economic recession and inflation.

Periods of deflation may nominally decrease the size of debt, but they increase the real value of debt. Since the money supply is tightened, money is valued more highly during deflationary periods; so even if debt payments remain unchanged, borrowers are actually paying more. In modern times, the government has struggled to spend less than it takes in for over 60 years, making balanced budgets nearly impossible.

The level of national debt spiked significantly during President Ronald Reagan's tenure, and subsequent presidents have continued this upward trend. Only briefly during the heyday of the economic markets and the Clinton administration in the late 1990s has the U. Political disagreements about the impact of national debt and methods of debt reduction have historically led to many gridlocks in Congress and delays in budget proposal, approval and appropriation.

Whenever the debt limit is maxed out by spending and interest obligations, the president must ask Congress to increase it. From a public policy standpoint, the issuance of debt is typically accepted by the public, so long as the the cause and effect of national debt on the citizens and us government are used to stimulate the growth of the economy in a manner that will lead to the country's long-term prosperity.

However, when debt is raised simply to fund public consumption, such as proceeds used for Medicare, Social Security and Medicaidthe use of debt loses a significant amount of support. When debt is used to fund economic expansion, current and future generations stand to reap the rewards. However, debt used to fuel consumption only presents advantages to the current generation. Understanding the National Debt Because debt plays such an integral part of economic progress, it must be measured appropriately to convey the long-term impact it presents.

Unfortunately, evaluating the country's national debt in relation to the country's gross domestic product GDPthough common, is not the best approach, for several reasons.

For one thing, GDP is very difficult to accurately measure; it's also too complex.

  • Given the amount of fiscal stimulus pumped into the U;
  • This phenomenon is a direct result of the fact it will be more difficult for corporations to generate enough pre-tax income to offer a high enough risk premium on their bonds and stock dividends to justify investing in their company;
  • Higher interest will have to be paid on government debt.

Finally, the national debt is not paid back with GDP, but with tax revenues although there is a correlation between the two. Comparing the national debt level to GDP is akin to a person comparing the amount of their personal debt in relation to the value of the goods or services that they produce for their employer in a given year. Using an approach that focuses on national debt on a per capita basis gives a much better sense of where the country's debt level stands.

Another approach that is easier to interpret is simply to compare the interest expense paid on the national debt outstanding in relation to the expenditures that are made for specific governmental services such as education, defense and transportation.

Economists and policy analysts disagree about the consequences of carrying federal debt. Certain aspects are agreed upon, however. Governments that run fiscal deficits have to make up the the cause and effect of national debt on the citizens and us government by borrowing money, which crowds out capital investment in private markets.

Debt securities issued by governments to service their debts have an affect on interest rates ; this is one of the key relationships that is manipulated through the Federal Reserve's monetary policy tools. Keynesian macroeconomists believe that it can be beneficial to run a current accounts deficit in order to boost aggregate demand in the economy. Most neo-Keynesians support fiscal policy tools such as government deficit spending only after monetary policy has proven ineffective and nominal interest rates have hit zero.

Chicago and Austrian school economists argue that government deficits and debt hurt private investment, manipulate interest rates and the capital structuresuppress exports, and unfairly harm future generations either through higher taxes or inflation.

Some believe that government debt is irrelevant when the central bank can print limitless fiat moneyalthough this is a minority view. History has shown that governments that abuse the printing press suffer from horrible inflationand this fear keeps policymakers from monetizing debt entirely.

Instead, the federal government either has to continue to borrow, sell assets, raise taxes, renegotiate terms or default to resolve debt issues.

What Goes into the Current National Debt? As indicated above, debt is the net accumulation of budget deficits. It is important to look at the top expenses, as they constitute the major factors of national debt. The top expenses in the U. The portion of national budget which is allocated for military related expenditures. Transportation, veteran benefits, international affairs, education and training, etc.

Interestingly, the common public belief is that spending on international affairs consumes a lot of resources and expenses, but in truth, such expenditures lie within the lower rung in the list. What's Made the National Debt Worse? History tells us that among the top expenses, the Social Security program, defense and Medicare were the primary expenses even during the times when the national debt levels were low, as they last were in the 1990s.

Then how did the situation worsen? There are various opinions on the matter: The overburdened Social Security system: Some argue that the mechanism to finance the Social Security system has led to increased expenditures without obvious payoff.

Payments are collected from present day workers and used for immediate benefits — that is, payments to existing beneficiaries.

Due to the increasing number of retirees and their longer life spans, the size and cost of payments has skyrocketed.

The National Debt Explained

Parents having fewer kids are limiting the pool of present-day contributing workers. Recent economic downturns have also led to stagnant pay. Overall, limited incoming and more outgoing cash flows are making Social Security a big component of the national debt.

Continued tax cuts introduced during the George W.

  1. Is it OK to run a deficit like we have for many years, or do we need to balance the budget? Get a free 10 week email series that will teach you how to start investing.
  2. Unfortunately, evaluating the country's national debt in relation to the country's gross domestic product GDP , though common, is not the best approach, for several reasons. Economic stimulus and related expenses.
  3. Among the top income sources for the government. Delivered twice a week, straight to your inbox.
  4. When debt is used appropriately, it can be used to foster the long-term growth and prosperity of a country.
  5. However, when debt is raised simply to fund public consumption, such as proceeds used for Medicare, Social Security and Medicaid , the use of debt loses a significant amount of support.

The cost and expenditures toward the Medicare and Medicaid programs have exceeded the projected figures. The general price rise in medical costs has been the hidden culprit, surpassing inflation by a wide margin. Economic stimulus and related expenses: There was a tightening of the growth rates to a more narrow range and a higher frequency of recessions — even before the Great Recession began in late 2007.

Trying to bring the economy back to life led to further costs and expenditure — the Stimulus Package of 2009, tax-cuts, jobless benefits and financial industry bailouts have led to further expenses at the national level.

Primarily within the defense budget, the continued involvement in these engagements has cost the U.

  1. Comparing the national debt level to GDP is akin to a person comparing the amount of their personal debt to the value of the goods or services they produce for their employer in a given year. There was a tightening of the growth rates to a more narrow range and a higher frequency of recessions — even before the Great Recession began in late 2007.
  2. Over time, this will cause people to pay more for goods and services, resulting in inflation.
  3. The government has become an expert at this process.
  4. Low interest rates make it easy for individuals and businesses to borrow money.

The public outrage also stems from the belief that situations in these countries were not having any direct serious impact for U. Some of these still continue, increasing the costs further. While outlays have increased, incoming revenues have been hit. Among the top income sources for the government: This is the topmost contributor to Uncle Sam's revenues: Individual taxpayers contribute nearly half of annual tax receipts. The challenge, along with the aforementioned Bush tax cuts, has been stagnant U.

Limited jobs and lower or stagnant salaries have been the blockade for increases in this stream of government income. Similar to corporate taxes, excise taxes too have shown dismal collections. What the National Debt Means to You Given that the national debt has recently grown faster than the size of the American population, it is fair to wonder how this growing debt affects average individuals.

  • However, this process is also flawed because people in developed countries tend to outsource more of their domestic services than people in lesser-developed countries;
  • Economic stimulus and related expenses;
  • Controversy with Every Method Debt reduction and government policy are incredibly polarizing political topics;
  • However, when debt is raised simply to fund public consumption, such as proceeds used for Medicare, Social Security and Medicaid , the use of debt loses a significant amount of support.

While it may not be obvious, national debt levels directly impacts people in at least five direct ways. As the national debt per capita increases, the likelihood of the government defaulting on its debt service obligation increases, and therefore the Treasury Department will have to raise the yield on newly issued treasury securities in order to attract new investors. This reduces the amount of tax revenue available to spend on other governmental services, because more tax revenue will have to be paid out as interest on the national debt.

Over time, this shift in expenditures will cause people to experience a lower standard of livingas borrowing for economic enhancement projects becomes more difficult. As the rate offered on treasury securities increases, corporate operations in America will be viewed as riskier, also necessitating an increase in the yield on newly issued bonds. This in turn will require corporations to raise the price of their products and services in order to meet the increased cost of their debt service obligation.

Over time, this will cause people to pay more for goods and services, resulting in inflation. As the yield offered on treasury securities increases, the cost of borrowing money to purchase a home will also increase, because the cost of money in the mortgage lending market is directly tied to the short-term interest rates set by the Federal Reserve, and the yield offered on treasury securities issued by the Treasury Department. Given this established interrelationship, an increase in interest rates will push home prices down, because prospective home buyers will no longer qualify for as large of a mortgage loan.

The result will be more downward pressure on the value of homes, which in turn will reduce the net worth of all home owners. Since the yield on U. This phenomenon is a direct result of the fact that it will be more difficult for corporations to generate enough pre-tax income to offer a high enough risk premium on their bonds and stock dividends to justify investing in their company.

This dilemma is known as the crowding out effectand tends to encourage the growth in the size of the government, and the simultaneous reduction in the size of the private sector. Perhaps most importantly, as the risk of a country defaulting on its debt service obligation increases, the country loses its social, economic and political power.