Rising of the National Debt - Term Paper Example

Microeconomics- national debt Introduction There is a requirement of Federal law which directs that the Congress in United s of America possess the power of borrowing any amount of money which is required to pay for the programs which has been passed by the Congress of the country (Mann & Roberts, 2012, p.75). There has been power given by the constitution towards controlling the expenditure as well as borrowing (Vries & Wanna, 2003, p.204). The limit of debt or the ceiling in debt introduced in the World War I was targeted towards giving the Treasury towards provision of flexibility. The flexibility was not having the Congress towards approving every new issuance of debt in every time when the government required towards borrowing for paying the things which the Congress has already voted for (Federal Debt Ceiling National Debt, 2012). 2. National debt rising up With the growth in national debt, the Treasury has increased in a periodical manner against the debt limit as well as debt ceiling (Austin & Levit, 2013). With the votes being raised among the limit of debt has increased manifold with little fanfare. In the year 2011, the ceiling of debt has become the central ground for the conflict of budget among the Republicans who took control of the House in the elections taking control of the House in the elections of the year 2010. American President as well as Democrats refused in raising the limits without a deficit reduction package. There was an impasse which was resolved at the last minute in the late July in the year 2011 with a plan of broadening the spending cuts if there would be no working of the deal that could be worked out for a large scale reduction. There was so called sequestration cuts which was scheduled towards taking effect on January, 2013 but has been pushed back until the month of March, 2013 with the bill being passed on the Day of New Year for heading off the fiscal cliffs of the cuts as well as tax hikes. Meanwhile on the month of December 31, 2012 there has been official borrowing limit known as the debt ceiling of around $ 16.4 trillion (Federal Debt Ceiling National Debt, 2012). The paper will be highlighting on the process of lowering the national debt which will be affecting the everyday hardworking American citizens in almost every aspect of their lives. Application of microeconomic theory especially the demand supply mechanisms will be applied to show the effects on price as well as quantities. 3. Processes of deficit reduction There has been different proposals being put forwarded by policy makers and the political parties towards debt reduction mechanism. The Republicans have claimed that a smaller government is required towards deriving a balanced budget (Erickson, 2012). Although it can be stated to be having some significance but the policy is rather far from being a panacea. The reason for this is that the Republicans have targeted towards too small of programs. When there was backing of legislation by the Republicans in curbing expenditure on the food stamp, there was only trimming of around $ 16 billion out of $ 80 billion food stamp budget. It has been stated that the proposals made by the Republicans do not possess the ability towards solving the woes of the nation’s fiscal conditions. There has been necessity of bigger reforms. The proposals as granted by Democratic parties in for tax hikes can be also stated to be far from panacea as well. It can be stated while the increase in taxes can neutralize the difficulties in budget but they are far from being actually neutralizing the problem all by them. On the surface it can be stated that the hike in taxes might be a good idea towards raising revenue simultaneously with the minimization of the income inequality gap. On further scrutiny it can be stated that the plan has also certain problems. The first problem is associated with the required breadth of the tax hikes. In the current situation the Federal taxes are around 18% of the GDP of the United States of America. For the purpose of balancing the budget these rates needs to be increased by a percentage of 10% or above in the next ten years. It can be stated that this is not only a huge hike which would be slowing down the economic growth on an all round basis but this takes care only of the deficits in the year 2023. But by then, USA will be picking up an amount of around 26 trillion of debt. Associated with this issue the Republicans and the Democrats are not able to stick to the issue. Through the expenditure on the cuts or that of only imposing tax hikes will be neutralizing the deficit to a small extent but on an overall basis the effect will be null. If the prime target is in cutting the fiscal deficit and eventually cutting down of debt then there should be an application of a comprehensive approach. It is a fact that the tax rise is an inevitable phenomenon. The implementation of various programs like that of the social security, Medicare as well as that of defense expenditure is doomed towards bringing failure to the budget of United States of America. There will be an all encompassing reform of revenue as well as spending must be occurring if the Republicans as well as that of the Democrats come on a same line towards getting rid of the shackles of the debt from the United States of America (Confronting the Realities of our National Debt, 2013). 4. Economic Analysis With the increase in macroeconomic growth and development, influences impart the economy (Kimenyi, Mbaku & Mwaniki, 2003, p.56). All of the microeconomic decisions of the people add to the macroeconomic forefront (Abel, 2011, p.427). In cases when the business owners will be employing less capital and employ less labor then there will be an overall suffering of the economy. This staggers the increase in wages as per the expectations of the people with opportunities tailored towards accumulating savings which will be accelerating the investments of the future. There will be negative effects on the middle income household that are recipient of income in the form of dividends or that of capital gains. With the increase in tax under Obama regime there would be decrease in the investment spending which would lead the economic recovery a more difficult one. Various adverse effects of tax increase would be facing worsened job market with lower wages as well as diminished returns on the savings which is the investment income. Fig.1 (Nell & Campbell, 2010) In the above diagram Ld is the labor demand curve and Ls is the labor supply curve. In this above diagram, the equilibrium wage is W and equilibrium quantity is L1 and as stated above with the rise in taxes the wage will be diminishing affecting the middle class Americans which will be also increasing of the labor supply curve and fall in demand which will also negatively affect the equilibrium labor employment within the economy. With the increase in tax or reduction in economic growth then there will be generation of incentives for the taxpayers towards evading taxes generating less revenue as compared to a static projection prediction. The economy is a complex social institution wherein the productive resources are being utilized by a large number of people with the turning up of the goods and services which the people require and want basically. Within the framework of a market system, where the people specialize as well as carry on trade the factors that affect the way in which the people use resources and purchase various goods as well as services which will have a system wide effect. This takes place as a direct effect of the change in incentives that cause people in making different allocation decisions. A chain reaction directs towards the causes that the others are trying towards making different buying as well as selling decisions with the others in changing their behavior and so on (Nell & Campbell, 2010). 5. Economic effects With the prior alarm of tax hikes, there has been increased purchases of the US consumers in the retail goods but a staggered pace with the signal with the year beginning tax hikes come up with restrained expenditure. There has been increase of tax on the working Americans with a percentage change of 2% from the previous month with the end of a tax break being implemented two years ago in order towards spurring the American economy. In that America’s richest citizens were also bound to pay higher tax rates. There has been a mild dampening effect with the increase in tax. The sales of the retail market went by a slant 0.1% with a 0.5% gain in the month of December. There has been increase in the sales figure by a percentage of 0.2% excluding the large auto sector. The senior economist at Credit National Association in Wisconsin stated that people cut their savings in cases where there is an increase in tax rates. He also stated that the consumers had indeed reduced spending to certain extents and he also states that it might be a sign of stress on the people who belong to the lower as well as middle income group. The expected retail sales remained unchanged on an overall basis with a 0.1% minus autos. The automobile sector that creates around one fifth of the total sales that have been prone towards large monthly swings has the possibility of distorting the broader retail trends. The consumer spending accounts for around 70% of the economy of USA and sales at retailers represent around one third of that total consumption. Retail sales have been deemed as a good proxy for showing the rate in which the economy is growing although the economist concentrate on the trends in the longer term as the data is basically volatile and are subjected towards sharp revisions. The tax hike has also not shown its full impact. A large number of people do not change their spending habit after the changes in the rate of taxes. There has been also a great concern to the higher gas prices. There has been increase in the average price to a level of $ 3.60 from a level of $ 3.30 for a regular gallon of gas since the start of the year depressing the sales for other retail goods. But it has been also expected that the US will be remaining on a modest growth trajectory despite of the headwinds in Washington. The economists predict that with a steady pace of hiring along with accelerated business environment as well as enhanced exports will strengthen growth along with stronger gains to be expected in the coming year (Bartash, 2013). 6. Conclusion The discussion thus focuses on the effects of the tax hike for reducing the national debt and the effect of the hike on the ordinary consumers of USA. The graphical explanation shows the adverse effects on the wage of the employees in the economy. Discussion has been also on the proper implementations that have to be taken in order to reduce the national debt without hampering the interests of the consumers. References Austin, A & Levit, M, R, (2013), The Debt Limit: History and Recent Increases. Available at, < http://www.fas.org/sgp/crs/misc/RL31967.pdf> accessed on February 22, 2013 Abel, A, B, (2011), Macroeconomics, Pearson Education India Bartash, J, (2013), U.S. retail sales growth slows after tax hikeConsumer purchases in January edge up 0.1%. Available at,< http://articles.marketwatch.com/2013-02-13/economy/37068497_1_retail-sales-retail-report-tax-hike> accessed on February 22, 2013 Confronting the Realities of our National Debt, (2013). Available at < http://rantaweek.com/category/economy-cat/> accessed on February 22, 2013 Erickson, E, (2012), The Republicans Have Failed the Nation. 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