Free Custom «The National Debt of the United States» Essay Paper

Introduction

Macroeconomic policy of every state implies public policy of its government aimed at limiting the levels of unemployment and inflation, supporting economic growth, preventing economic crises as well as ensuring stable functioning of the economy. Macroeconomic policy of every country depends on its domestic economy as well as the phase of the economic cycle within the country, i.e. the rise or recession. If the country is in recession, the authorities carry out an enabling policy aimed at bringing the country out of the crisis. If the country is experiencing the rise, the government conducts the policy of deterrence in order to prevent a high inflation rate within the country.

The path of US history is based on the steady growth of foreign trade, state budget expenditures as well as the constantly increasing size of public debt. In fact, over the past decades the United States has become the largest debtor in the world. Since 1940, the US population has increased by 100%. During the same period, the US national debt has increased by 12 043%, i.e. more than 120 times as much (“The Dynamics of the US National Debt” n.d.). Based on the above-mentioned, the following paper is aimed at discussing national debt of the United States in the context of current macroeconomic policies in the monetary and fiscal spheres. The paper will analyze the dynamics of the US government debt, define possible drawbacks it imposes to the economy as well as providing the reform proposal aimed at tackling such drawbacks.

 

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The US National Debt Overview

The notion of national debt implies the financial debt of the state, conducted to cover the budget deficit. In other words, national debt includes the previous years’ deficits with the deduction of budget surpluses, i.e. the difference between the government spending and receipts. However, it should be mentioned that national debt does not include the state’s obligations in the field of social security and pension. For a more objective assessment, national debt is usually evaluated not only in the national currency or its equivalent, but also as a percentage to the rate of the gross domestic product (GDP).

The key reasons for the emergence and growth of national debt imply the following:

- Permanent government budget deficit.

- Fiscal policy aimed at reducing the tax oppression without the corresponding reduction of government spending.

- Influence of the political business cycles.

- Militarization of the economy due to ongoing military conflicts (Johnson and Kwak).

Growth of public debt leads to negative economic consequences. Firstly, interest payments on national debt increase income inequality, since a large part of the government’s commitments is concentrated in the most affluent segment of the population. Repayment of national debt leads to the fact that money from the pockets of the low-income segments moves to those who own bonds. Secondly, as a tool of payment or decrease of national debt, the increase in the tax rates could undermine the effect of economic incentives for the development of production and reduce the interest to invest into new ventures. These can decrease the rate of innovation and generate tension in the society. Similarly, the existence of a large public debt could undermine economic growth of the country. In addition, payment of interest or principal payments to foreigners can cause certain transmission of the actual production abroad.

Another negative outcome implies transferring the real economic burden of the debt onto the shoulders of future generations, leaving the smaller size of basic production assets to the generations to come. This feature is associated with the effect of crowding out, which is determined by the fact that deficit spending increases interest rates and, therefore, reduces investment costs. If this happens, next generation will inherit an economy with a reduced production capacity, and hence, if nothing changes, the standard of living will be lower than the current one. In addition, growth of external debt reduces international prestige of the government, increasing uncertainty among the country’s population about the future.

The US national debt includes debts of the US federal government to its creditors. However, the US public debt does not include debts of individual states, corporations or individuals, even those which are guaranteed by the state, as well as future obligations to recipients of social assistance. The US national debt is known to be among the largest ones in the world. According to preliminary calculations, in 2015 external debt of the US is estimated to be $18 trillion. International creditors have at their disposal not more than 30% of liabilities, while the remaining part of the debt is concentrated in the internal market.

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Among the biggest investors into the US securities, the following countries can be named:

- China. It accounts for 23% of the US total external debt, which is equivalent to $1.3 trillion (“The Dynamics of the US National Debt” n.d.).

- Japan. It accounts for 22%, which is $1.1 trillion respectively (“The Dynamics of the US National Debt” n.d.).

- Member states of the OPEC.

The above-mentioned countries are characterized by the maximum volume of bilateral trade with the United States, ensuring the highest rate of the country’s turnover.