National debt is a very important and essential part of a country’s financial system. The definition of national debt itself is the amount of money owed by the federal government to many sources (Moffatt). In this case, United States federal government. In the United States, national debt is also known as government debt and federal debt. The current debt of the United States is over $19.2 million. According to the United States Census Bureau, those amounts mean 106% of the Gross Domestic Product (GDP), 553% of annual federal revenues, $59,516 for every person living in the U.S, and $160,827 for every taxpayer in the U.S. (Agresti).
Throughout history, United States always maintains some amount of debt. However, after World War II, the debt levels have never been as high as they are now. Without further action, the levels are going to keep increasing. Over the last 40 years, government spending has always been higher than the revenue collected (“Q&A: Everything You Need to Know about the National Debt.”) Such act is also known as budget deficit. To cover up the difference, the government has to borrow money. Borrowing money means selling securities, such as Treasury bonds, and paying the bondholders back with interest. If the federal government runs budget deficit for multiple years, say 40 years, the deficit and the interest on that borrowing become national debt (“Q&A: Everything You Need to Know about the National Debt.”).
Currently, as reported in U.S. Debt Clock, the federal spending is over $3.8 trillion and the federal tax revenue is over $3.3 trillion. Based on the Federal Budget 2013 Total Outlay Figures, healthcare programs, which include Medicare and Medicaid, are identified as the top expenses in the United States. A total of $940 billion has been allocated to the healthcare benefit program (“Q&A: Everything You Need to Know about the National Debt.”). In the year 2013, $882 billion was spent on the Social Security Program (Seth). The program is aimed at financial security for the retirees above 65 to keep them above the poverty line. That makes it the second-biggest government spending in the U.S. The government also has to provide the U.S. defense budget for military purposes. In the same year, The Washington Post reported that military-related expenditures were $718 billion. The government also has to take care of other expenses, such as transportation, veteran benefits, international affairs, space programs, education, and training (Seth). The United States income sources, which mostly rely on taxes collected from individuals and businesses, cannot afford to exceed or even out the expenses.
The years between 1998 and 2001 can be referred as the “Golden Years” because those were the only years where United Sates had budget surplus. Budget surplus occurs when the government’s expenditures are less than its tax revenue. Every year since then, budget deficit always occurs. There are some factors that have led to the current debt level in the United States. First, the finance mechanism of Social Security system has increased the expenditures without a clear payoff (Seth). Payments collected from the current workers are used for “immediate benefits payments” for existing beneficiaries instead of giving it to the retirees (Seth). All in all, limited income and more cash flow make Social Security program a big burden for national debt (Seth). Second, during George Bush’s presidency, continued tax cuts were introduced, reducing the government’s income (Ruffing and Friedman). Third, the cost and expenditures of Medicare and Medicaid programs have surpassed the inflation by reason of spending more than the “projected figures” (Seth). Involvement in the Iraq, Libya, and Afghan wars has cost the United States dearly. Around $1.3 trillion was spent, adding a significant amount of debt (Seth). On top of that, the economic crisis and response also contribute. Falling income levels and higher unemployment lower the revenue and automatically increase the spending, especially on unemployment benefits program and food stamp (“Q&A: Everything You Need to Know about the National Debt.”).
The majority of United States debt is held domestically, but as the years go by, foreign investors hold more of the debt. In the spring of 2015, according to U.S. Treasury Department, the federal government owes money about 29.7% of the national debt to U.S. individuals and institutions. The second highest percentage is about 15.1% to the U.S. Social Security trust fund. Meanwhile, the U.S. Federal Reserve holds the next highest percentage, about 13.8%. 7.9% of the United States total debt is owed to China and 13.7% to all other foreign nations excluding Japan, Belgium, Brazil, and the United Kingdom. The percentage of said countries are between the ranges of 1.1% – 1.4% while Japan is 6.8%. As a matter of fact, United States does not owe much to U.S. civil service and military retirement fund, both are 4.5% and 2.9%.
High national debt is very serious and problematic. The consequences are real. It can cause reduced fiscal flexibility. As a result of the Great Depression, U.S. debt has doubled from 35% of GDP to over 70% between 2008 and 2013 (Lefranc). With that being said, not to mention the fact that the debt is already so high, the government has less room to be concerned about future and inevitable economic crisis. U.S. debt also leads to slower economic growth, lower wages, and weaker job markets. According to Lefranc, every dollar investors spend on buying government debt is a dollar not invested elsewhere. In other words, higher debt means crowding out better investments which slows the economic growth (“Q&A: Everything You Need to Know about the National Debt.”). Debt growth can eventually lead to a fiscal crisis as happened in Europe. Those who have invested in U.S. debt will demand higher returns, increasing interest payments (Lefranc). In the end, people will find themselves in an out of control situation. U.S debt not only affects people in the current generation but also children and future generations. It creates generational inequality because U.S. is consistently making irresponsible debt choices, placing a higher burden to the next generations (Lefranc). It is a common knowledge that the higher the debt is, the higher the interest rate. Large amount of debt means higher interest rate on everything from credit cards, car payments, student loans, to mortgage loans (Lefranc). Since debt is caused by higher government expenses than its revenue, at some point the government has to think about raising more revenue which means higher taxes (Handley).
There are variety strategies government use to reduce federal debt. Each has its strengths and weaknesses. Moreover, not all tactics work well. For example, the government often issues bonds to raise money so they can stimulate spending without increasing taxes. However, the government also has to pay interest to the creditors on those bonds. Even though issuing bond has provided an economic boost for some countries, it is not effective enough in reducing long-term debt (Smith). The government also maintains low-interest rate to make it easy for individuals and businesses to borrow money. In return, the money they borrow can help create jobs and tax revenues. It has to be noted that keeping the interest rate at or close to zero for periods of time has not proven to be effective to lower the debt (Smith). Raising taxes is another tactic government uses. Even with the unsuccessful results of the practice, the government still frequently uses this (Smith). It is possibly due to the failure to cut spending since when cash flows increase and spending rises, the increased revenues only make a little impact in reducing debt levels (Smith). On the other hand, when the government raise taxes and cut spending at the same time, they reduce their debt. The proof was during Truman’s and Eisenhower’s presidencies, U.S. debt was paid down (Smith).
Solving the debt crisis in the United States is not a simple task. It will possibly be a long-term solution. We can raise the retirement age for Social Security to encourage people to work longer. Working longer means more taxable income. Another way is to decrease entitlement spending and by that means reducing money used to fund programs like Social Security, Medicare, and Medicaid. Also, the government can require well-off individuals to pay more of their share of Medicare. Last but not least is passing an energy tax by taxing carbon emissions or gasoline rather than taxing work and investment.
In conclusion, federal debt is indeed a big problem for a country. If the debt is high, it can impact severely the country and its citizens. There are no easy solutions for this but the sooner the government acts, the easier it will be to make changes that can be phased in little by little to be less disruptive. Reducing so much debt levels is not a quick fix, but it takes time. Reducing a significant amount of the national debt requires outside-of-the-box thinking and plans to address the major problems that cause the debt itself. Sometimes we have to make hard choices and sacrifice so much for a greater good.