The U.S. National Debt - Coursework Example

The National Debt Introduction The U.S. National Debt can best be described as our collective bank account and is one of the major gauges of the country’s economic health. The ever-increasing Debt can be accurately described one of the biggest threats to the wealth and security of the nation. Currently at its highest point in history, if it is not quickly addressed and lowered substantially the Debt will result in the further lowering of the standard of living for all Americans due to a continued sustained economic stagnation. It’s not just an intangible number that doesn’t directly affect people. As is already the case, the rising Debt takes away monies form a range of governmental programs that help the most vulnerable, the economically disadvantaged, a condition that will only grow and worsen if the present trend is not reversed. Other government financed interests such as military, infrastructure and education will suffer significantly too. Congress has been especially ineffective and deadlocked the past few years. If this institution does not act to control its overspending and increase revenues such as allowing the Bush tax cuts to expire, the nation’s economic future is headed for a cataclysmic economic abyss. Philosophical Reasoning for National Debt More than 150 years ago Karl Marx, a famous German social theorist spoke of this issue and predicted that capitalistic societies would justify enormous debt so as to fund foreign military ventures designed to, paradoxically, increase the nation’s wealth. Marx proposed that centralization, the amalgamation of “big business,” would become progressively more common. Centralization increases market share while decreasing competition and reduces the cost of labor. The only component of a nation’s overall wealth the working class would be allowed a share in is the nation’s debt. These prophetic words were an accurate predictor of future events and societies are living with the consequences of not appreciating the concept. According to Marx the upper class, the “top one percent,” creates the debt by subsidizing needed and, some would argue, un-needed projects that fuel personal interests in addition to military expenditures. Marx did not speak specifically of increasing the debt for government bailouts due to financial institutions being irresponsible regarding subprime mortgages or credit default swaps but his basic philosophy of the working class paying for the whims of the upper class was accurate. To add insult to injury, those who are flush with cash invest in federal bonds which are used to fund the debt that workers are paying for through taxes which are directly deducted from their paychecks. “Taxpayers pay interest to the rich bondholders of that national debt. The rich make money both ways in the creation of the debt and the interest paid on it” (Taylor, 2010). History of the National Debt The National Debt was initiated four years after the ratification of the Constitution, two years after George Washington took the oath of office. In other words, very soon after the nation became a nation. That year (1791) that debt stood at (adjusted to current dollar value) $75 million, an astronomical number in those early days of the republic. Andrew Jackson, the eighth President (1829-1937) insisted on a fiscally prudent approach to governmental spending. At the end of Jackson’s second term the Debt had plummeted to an incredibly low figure of (adjusted) $37 thousand (Suter, 2004). According to the recently released Obama’s Budget this year’s deficit, the annual payment on the Debt, will reach $1.6 Trillion. The National Debt will stand at $15.4 Trillion. (Dinan, 2011) These numbers are far past the Founding Father’s comprehension or anyone today either. Examples that attempt to illustrate numbers this high do little to help gain proper perspective. If someone spent a million dollars every day from the time of Christ, they would need to continue on this spending bender for 700 more centuries to total just one trillion dollars. The Debt exceeds $15 trillion. The Deficit (yearly payment) when President Clinton took office (1993) was $300 billion which he transformed into a surplus of $160 billion by the time he left office. “Spending restraints employed by Clinton brought federal spending down from 22 percent of the Gross Domestic Product (GDP) in 1992 to 18 percent in 2001, the lowest since 1966.” (Freeman, 2004). Reagan (1981-1989) introduced “trickle down” economics which theorized that if the wealthy, who are erroneously known today as “job creators,” had more money they would invest and hire at a greater rate thus providing jobs and fueling the economy. Put another way, the rich got richer during the Reagan/Bush years. The economic strategy, incredibly, continues to be promoted by Republicans even after it failed spectacularly during Bush-the-son’s presidency (2001-2009) causing the Great Recession of which the nations is still trying to recover. Congress implemented what it characterized as a ‘pay-as-you-go’ policy along with targeted federal spending cuts in the early 1990’s. This sensible approach resulted in four consecutive years of budget surpluses. Clinton proclaimed that the country could pay off the entire Debt by 2013 if it continued to be as fiscally responsible. That optimistic yet reachable economic prediction was made less than 20 years ago but today seems like a centuries ago forgotten fantasy. The Debt has more than tripled since 2000. The ‘pay-as-you-go’ principle ended in 2002. Congress immediately began to cut taxes, a politically beneficial act and also increased spending at a rapid rate. “The Bush administration cut the taxes of the rich while increasing military expenditures on The War on Terror, invasions of Iraq and Afghanistan and the rebuilding of those countries. The debt tallied during the Bush years exceeded even the Reagan administration’s record levels. It has severely hampered America’s ability to continue to effectively defend itself or become involved in other potential conflicts worldwide.” (Schoen, 2006). The trillions of dollars spent by the Bush administration causing the massive Debt were not used for education, infrastructure or public programs. Show Me the Money According to 2011 statistics by the U.S. Office of Management & Budget 34 percent of the current National Debt was caused by the Bush era tax cuts. The Iraq War accounts for 23 percent and the Bush/Obama stimulus programs are responsible for 21. The bank bailout and not funding the Part D prescription drugs plan, both during the Bush era account for about 15 percent. Lost revenues from the high unemployment caused by the recession, interest on the debt and higher than expected Medicare/Medicaid costs together add up to four percent. (Rasmus, 2011) “Both sides of our political elite have contributed to the sense of fiscal crisis. And as we continue down these path dangerous big banks, out-of-control health care spending, significant tax cuts, small changes in nonmilitary discretionary spending and irresponsible rhetoric on both sides, we are well on our way to a real crisis” (Johnson, 2011). The bank bailout refers to the Congress generated, Bush approved and Obama supported Troubled Asset Relief program (TARP). $700 billion went to financial institutions that, in short, gambled their customer’s money and ultimately lost, the customers lost because they bailed out those same banks with their tax dollars. Fannie Mae and Freddie Mac, federally funded mortgage companies, received $200 billion due to the housing price bubble bursting which was caused by the banks knowingly lending money, in some cases fraudulently, to people who couldn’t afford the house. “It is important to note that this $900 billion direct bailout does not include the roughly $9 trillions of dollars injected into the banks by the Federal Reserve, which was the true source of the bailout of the banks since 2008.” (Rasmus, 2011) The Federal Reserve operates with a financial ledger which, interestingly, is not subject to audit by the government but the money it loaned to the banks does not add to the Debt. The inner-workings of “the Fed” are complex and secretive. A simplistic explanation is that the Fed can print all the money it wants, a move that would cause inflation unless it acts to lower the interest rate, which it did. Medicare Part D is a prescription health care program for seniors. Congress spent $630 billion to further subsidize medicine for the elderly, a nice thought but the entire amount was borrowed, added to the Debt. This program was passed suspiciously close to the 2004 Presidential election in an effort some claimed to gain the vote of older Americans. Medicare and Medicaid, separate form Part D, also added to the Debt because of spiraling costs of health care services. Three years of high unemployment means taxes aren’t being collected. This revenue shortage has added significantly to the Debt. Prior to 2007, 7.1 million were unemployed. By 2010, that number had grown by 18 million to about 25 million Americans not earning paychecks. The exact figure of lost revenue can only be estimated using reasonable economic assumptions. Given a median yearly salary of $47,000, an average of six months off work, a 20 percent tax rate times three years for 18 million people calculates to $255 billion. Federal revenues also suffered from lost corporate income and payroll taxes, both connected with the massive layoffs. “The true causes of the deficits and therefore the run-up in the federal debt are wars and runaway Pentagon equipment spending, the Bush tax cuts, the bailouts of banks and corporations, the fiscal stimulus packages of Bush-Obama that didn’t result in economic recovery, the chronic three year-long 25 million jobless situation, and price gouging by health insurance and health services providers.” (Rasmus, 2011) It’s Obama’s Debt Now President Obama recently submitted the last budget before his reelection bid this November. The proposed 2013 budget contains a new economic stimulus package totaling $350 billion intended to encourage domestic manufacturing thereby adding jobs, entice employers to ship jobs back to the U.S., retrain workers, hire teachers and repair the country’s infrastructure, a key component in commerce and trade. Few social programs will be directly pruned. (Montgomery, 2012) The Bush-era tax cuts for those earning more than $250,000 per year would not be extended which is projected to cut the Debt by $2 trillion over a ten year period. Obama also wants to raise the stock dividends tax rate, from 15 percent to as high as 39 percent for households that earn $250,000 or more per year. Recently Republican Presidential candidate Mitt Romney made public his tax statement showing he paid about 15 percent. This is due to his income being largely derived from dividends and capital gains. Obama thinks he and other like him should contribute more. According to the White House this proposal would create $206 billion in tax revenue over the coming decade. The President’s budget also suggests “principles” to be considered when Congress decides to reform the tax code, a long overdue objective both sides of the political spectrum want to accomplish. The most significant of these principles is to replace or revise the alternative-minimum tax (AMT). This tax law was enacted to make sure the wealthy didn’t avoid paying taxes via various loopholes but because it doesn’t account for inflation it is unintentionally affecting middle-income taxpayers. Obama further suggested ultimately substituting the “Buffet Rule” for the AMT. “The so-called Buffett Rule would require those who earn more than $1 million to pay a tax rate of at least 30 percent and prevent them from claiming deductions to push their tax rates down.” (Lee, Paletta, 2012) The budget also proposes to cut federal health-care program costs by about $360 billion during the next ten years largely by cutting wasteful spending which includes over-payments to drug companies. The $3.8 trillion budget includes provisions agreed to by congress during last year’s debt ceiling debate. These conditions include limits on expenditures across the board including military and domestic spending. “Obama said his proposal would save at least $4 trillion over the next 10 years and stabilize government borrowing” (Montgomery, 2012). Despite these encouraging Debt reduction figures, budget deficits are projected to be somewhat higher than they were calculated to be last September when Obama submitted his debt-reduction plan to Congress. White House officials said the increase is due to recalculated economic forecast which was slightly lower. A slower economy decreases tax revenues and increases government expenditure which cause deficits to increase. If the budget were presented today, according to officials, the outlook would be more optimistic because job growth has been better than projected. Obama sent a scolding letter to Congress last month regarding the 2013 Budget and the National Debt which read, in part, “reining in our deficits is not an end in itself” but “a necessary step to rebuilding a strong foundation so our economy can grow and create good jobs.” The President drew a clear distinction between his and the Republican approach by saying he “rejects the ‘you’re on your own’ economics that had led to a widening gap between the richest and poorest Americans.” (Montgomery, 2012) Though the Republican held House of Representatives will most likely alter Obama’s 2013 budget as it reads now, it is aligned with his overall platform which encourages economic “fairness” and shared sacrifice. (Lee, Paletta, 2012) Conclusion The country faces many complex issues that should be addressed such as poverty and homelessness, immigration reform, the continuing crisis in the Middle East, education, alternative energy, unemployment, etc. but the first priority must be substantially lowering the National Debt. A large portion of federal revenues each year has already been spent paying interest on the Debt, money that could be better allocated for the issues listed above and many other concerns. If allowed to continue at its present skyrocketing rate the Debt would cause interest rates to rise and the stock market to fall crippling the U.S. economically and likely plunge the country into the third-world status. The Debt forces austerity measures which hurt the most vulnerable, a segment of the population that doesn’t need to be worse off than they are now. Future generations will not inherit the same prosperous nation and will ask why reasonable measures were not taken to avoid the economic downfall of the richest country the world has ever known. The answer would be that this generation chose not to learn from history, that trickle-down economics, tax cuts for the rich and deregulation of industry lines the pockets of the top one percent at the expense of the other 99 and future Americans as well. Works Cited Dinan, Stephen. “Deficit on Track for a Record This Fiscal Year” The Washington Times (February 14, 2011). Web. March 8, 2012 < http://www.washingtontimes.com/news/2011/feb/14/debt-now-equals-total-us-economy/> Freeman, Robert. “Evaluating Bush’s Economic Performance: A Field Guide for the Perplexed.” Common Dreams Newscenter. (September 27, 2004). Web. March 8, 2012 Johnson, Simon. “Does the U.S. Really Have a Fiscal Crisis?” New York Times (February 24, 2011). Web. March 8, 2012 Lee, Carol E..Paletta, Damian “Obama Seeks New Taxes on Rich” Wall Street Journal (February 14, 2012). Web. March 8, 2012 < http://online.wsj.com/article/SB10001424052970204795304577221063135502908.html> Montgomery, Lori “Obama budget: National debt will be $1 trillion higher in a decade than forecast” The Washington Post (February 14, 2012). Web. March 8, 2012 < http://www.washingtonpost.com/business/economy/obama-budget-national-debt-will-be-1-trillion-higher-in-a-decade-than-previously-forecast/2012/02/13/gIQA2Rn1AR_story_1.html> Rasmus, Jack. “The 8 Real Causes of Deficits and the Debt.” Predicting the Global Economic Climate (November 17, 2011). Web. March 8, 2012 Schoen, John W. “Why is the National Debt Out of Control?” MSNBC. (2006). Web. March 8, 2012 Taylor, Bryan. “Paying Off the Government Debt.” Global Financial Data (October 13, 2010). Web. March 8, 2012 < http://www.globalfinancialdata.com/news/articles/government_debt.pdf> Read More