Debt/ Deficit crisis in the U.S Government
Consider all the possible ways the government could:
reduce spending
increase revenue through taxes and fees
create a new revenue stream through a product or service.
Mention with each suggestion:
who would support this idea
who would be harmed by it and would not support it.
You can present these in bullet format rather than essay format.
Here are some articles you may want to read before coming up with your solutions to the debt problem.
Do voters care about the national debt? (Links to an external site.)
https://www.pgpf.org/blog/2019/12/do-voters-care-about-the-national-debt-the-polls-say-they-do (Links to an external site.)
What is the true cost of the Corona Virus bailout? (Links to an external site.)
https://www.washingtonpost.com/business/2020/04/05/what-2-trillion-coronavirus-bailout-is-really-going-cost/ (Links to an external site.)
Two issues are covered here: (Links to an external site.)
1) Impact of decreasing corporate taxes; and
2) ways to reduce the debt and deficit spending.
https://www.investopedia.com/updates/usa-national-debt/ (Links to an external site.)
Who the debt is owed to in percentages is here:
Who debt is owed to.docx
The Challenge for Post-Baby Boomers
“Après moi, le déluge” is a French expression credited to King Louis XV, who apparently didn’t care much what happened to his empire after he died. It means, “After me, the storm.” This is what the Baby Boomers have said to you. They have run you into horrendous debt and continue to do so and without a plan to pay it down. That task – the storm – they are leaving to you.
Let’s look at four issues surrounding the debt and then talk about what can be done to solve the problem. 1) The history of the debt; 2) The difference between the debt and deficit; 3) Crowding Out by the government; and 4) Government revenue and expenditures.
The history of the debt is in this chart.
US National Debt-as of spring 2020.docx
Notice that the debt increases rapidly during times of war. Up until the middle of the 20th century, the government attempted to pay down the debt after each war. You can see that in how the debt decreases for a time after each war. But once we get out of WWII, the debt doesn’t go down. That is because of Cold War military spending including the arms race with Russia, social spending, and the Vietnam and Korean wars. In addition, under Reagan tax cuts, taxes were significantly reduced for the top 10% income earners and for corporations. This reduced the amount of money the government took in. These tax cuts were not matched with cuts in spending, and in fact Reagan and presidents since Reagan increased government spending without increasing taxes. How do they make up the difference? They borrow – hence the ever-increasing debt.
The difference between debt and deficit is explained here.
https://www.investopedia.com/updates/usa-national-debt/ (Links to an external site.)
Keep in mind that deficits are calculated yearly – how much did the government over-spend in a given year. The debt is all the deficits from past years added together. Imagine year 1 of college you end the year with $5,000 on a credit card. That is your year 1 deficit. Year 2 you put an additional $6,000 on a credit card. $6,000 is your year 2 deficit. Your debt is $11,000. So, debt is the accumulation of deficits.
Crowding Out is explained here.
https://www.investopedia.com/terms/c/crowdingouteffect.asp (Links to an external site.)
Crowding out is important because without the Federal Reserve artificially holding down interest rates when the government over-borrows, there would be ever-higher interest rates and private borrowers would not be able to get affordable loans for starting or expanding businesses or for buying homes. This would slow down the economy and cause unemployment and other economic problems. So, the Fed keeps interest rates low (as in right now) to keep the economy from staggering to a halt. This is happening even though the government needs to borrow and technically should be crowding out private borrowers. How does the government borrow without crowding out private borrowers and causing interest rates to skyrocket? The government, or the Treasury, holds its own debt. In common terms, it prints money.
Government Revenue and Expenditures charts are here.
This chart shows you where the government’s money comes from and how that has changed over the past several years. You can use this chart to determine where you think the government could bring in more money.
The Federal Budget Revenue Table.docx
This chart shows you where the government spends its money and how much it over-spends relative to its revenue, or what it brings in. You can use this chart to determine where you think the government could cut spending.
Budget Expenditures.docx
Why does the Federal Government Borrow?
Congress and the president are the ones who must agree on a budget and they have obviously supported borrowing over other options. And why? Because if they raise taxes or cut government programs, they don’t get re-elected. If you factor in the potential harm of crowding out, every possible solution to paying down the debt or the government only spending what it brings in, makes some group of voters mad. Home buyers and sellers don’t like high interest rates, either do companies that sell consumer products. The elderly and people on fixed incomes don’t like their government programs reduced. The military and military-related industries don’t want military spending cut. And no one wants to pay higher taxes. There was a concerted effort made during the Reagan years to convince people that taxes were a penalty and not a responsibility. It was an easy sell and add to that a generation of Baby Boomers with a sense of entitlement and you have the ever-ballooning debt.
Investopedia forgot something:
In the Investopedia article you read about how to reduce the debt and deficit spending, the author said: “The national debt can only be reduced through five mechanisms: increased taxation, reduced spending, debt restructuring, monetization of the debt, or outright default.”
They forgot another way and that is a revenue stream the government can depend upon that comes from a product or service the government provides. Mexico does this with Pemex. The Mexican oil company provides about 90% of the Mexican government’s revenue. Granted, this is a remarkably corrupt enterprise, with a government that is over-dependent upon this one resource, but it is a model that has potential if done properly. Consider that the U.S. spent years and a lot of taxpayer money developing the internet. The taxpayers paid for it, but taxpayers got nothing out of it – no revenue generated by the creation of the internet goes directly back to the government. It’s too late now, but maybe it should have generated a revenue stream from the outset of the government turning this resource over to the private sector. Maybe the government needs another chance, another product or service it pays to develop and then uses as a source of revenue. It’s interesting to consider what that product or service would be
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