Budget Deficits: Is the U.S going bankrupt?
ECO203: Principles of Macroeconomics
July 25, 2011
The role of government in the U.S economy extends far beyond its activities as a regulator of specific industries or gatekeeping. The government is also responsible for managing the overall pace of economic activity, with its objective of maintaining high levels of employment and controlling price stability (inflation). It has two main tools for achieving these goals: fiscal policies, which is done through taxes and spending and monetary policies, through which it manages the supply of money. In this paper, I will discuss the why high deficits of today will reduce growth rate of the economy in the future, look at the history of our nation’s debt and deficits, different elements that causes of deficit and why the cause actually matters, what role the fiscal and monetary policies have to lead to higher or lower budget deficits and how deficits affect the overall long-term economic growth and debt of the U.S. Let us first begin by learning the difference between the terms debt and deficit. In economics, the term deficit means a shortfall in revenue of a fiscal year. It is when the government’s revenue called receipts, which are collected taxes (payroll, corporate, excise, income and social insurance), fee revenues and tariffs that are called receipts are lower that what is spent called outlays. In other words, the federal budget deficit is the yearly amount by which spending exceeds revenue. The term debt is described as an accumulation of deficits so the national debt is the total amount of money owed by the government. It is calculated by adding all of the deficits minus the surpluses since the nation’s inception and you get the current national debt. According to Econintersect, “the estimated 2011 budget deficit is at almost $1.5 trillion, following deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010.” ¶ 1. This is disturbing when measured as a percentage of the gross domestic product (GDP), it is 9.8% (2011), 8.9% (2010) and 10% (2009). As of today, the current national debt is 14.46 trillion dollars. To get an idea of how much debt we are discussing I will use an example provided by Coastline Financial Solutions “Let’s say you work 8 hours a day, 5 days a week, 50 weeks out of the year (you get a 2 week vacation) making $100,000 an hour. It would still take you 70,000 years to pay off the debt.” With the federal government borrowing that much from tax payers, it will be a very daunting and bleak economic future for the U.S if this continues. This correlates to the question of why deficits of today will reduce the growth rate of the economy in the future. To make sound decisions in our present condition and economic future, we must first analyze and review the history of American debt. Understanding how the federal government creates its debt and how the deficit is incurred provides great information to comprehend its short and long-term effects on the economy. In this astronomical debt a new phenomenon for America or is it a reoccurring theme? Since its inception, the U.S has had public debt. The fiscal year from 1789 to 1842 began on January 1 so the beginning of the fiscal year of 1791; the national debt was recorded as $75,463,476.52. By 1816, the debt grew to $127,334,933.74 but then contracted to nearly zero in late 1834. In the beginning of 1835, we began our fiscal year at $33,733.05. Unfortunately, that was short-lived and by 1839 the national debt surpassed $10 million. In 1842, Congress changed the fiscal year from January 1 to July 1 which lasted until 1977. After the 2nd changed of the fiscal year, we began to see dramatic growth in our national debt due to the Civil War. President Abraham Lincoln was in need of money to fund the war and ordered Congress to pass a bill authorizing the printing of full legal tender treasury notes. This decision caused our debt to soar from $65 million in 1860...
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