Download ZBB_Essay1_National_Debt - Duke Mathematics Department

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Zachary Brown
Game Theory and Democracy
16 October 2011
Analysis of U. S. Debt
Imagine a nation where every citizen had more than 47,000 dollars in debt.
Imagine a nation where the national debt increased 3.97 billion dollars on average every
day. Imagine a nation with more than 14.5 trillion dollars in debt. This is the reality
America finds itself in today (U.S. National Debt Clock 1). This in itself is shocking but
America’s financial situation has an even bleaker outlook as it faces rising expenses as
the baby boomers begin to retire and the government continues spending. I conducted a
survey of college students, asking people to rank their opinion from one to ten of the
severity of America’s debt problem. Ten was the plurality winner, top two runoff
winner, and IRV winner. However, seven was the borda count winner, least worst defeat
winner, and ranked pairs winner. Also, seven was the Condorcet winner. These voting
methods illustrate show how different voting systems can create different results. These
results reveal the insecurity of Americans in their economy caused by the national debt,
whether the debt is a legitimate problem or not. This paper will analyze the significance
of the debt problem of the United States.
One concerning factor about the enormous debt of America is that foreign
investors, banks, and governments hold more than a quarter of the U. S. debt. If they
wanted their money back, they could create a panic in America because the government
would not have the money to pay them (Bittle 12). They could start a ripple effect where
domestic investors start selling their U. S. Treasury bonds (13). If investors stop buying
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U. S. Treasury bonds, than the Treasury Department would have to raise interest rates,
making credit card bills and many other things more expensive for Americans (29). As
America creates more debt, it creates more risk for investors who buy its bonds. This risk
will eventually discourage people from buying bonds and would force America to fund
its debt in a new way. Increased interest rates would hurt the economy very badly
because America is already experiencing a recession.
Another troubling issue regarding the debt is the interest America pays on its debt.
The interest on the debt will eventually become incredibly onerous on the American
economy (Flying on one Engine 2). America paid 80 billion in the first four financial
months of 2011 (Bibieri 1). Last year alone, the cost of interest rose by 13.2 percent (1).
The U. S. government wants to be spending money on the domestic economy to help get
it out of a recession, making the use of a significant amount of money on interest very
burdensome for the economy. More alarmingly, the figures for the cost of interest seem
to be going up. America is continuing to create more debt and is experiencing deficit
spending. In 1980, America was a creditor nation, but because of spending and a trade
deficit America has become the biggest debtor nation (Flying on One Engine 2).
However, the U. S. government spending more than it makes is not a new phenomena.
The nation has spent more on government programs and services for the last thirty-one
years out of thirty-five than it has collected in taxes (3). In 2009, the government spent
683 billion dollars on Social Security, 661 billion dollars on national defense, and 430
billion dollars on Medicare (Bittle 93-97). This spending needs to decrease for America
to settle its debts. Politicians have also been borrowing from the Social Security and
Medicare surplus created by the baby boomers to not raise taxes or cut spending. This
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means that the government will not have the money to cover Social Security and
Medicare benefits for the people who want to retire (Bittle 126). In addition once the
baby boomer generation starts to retire, the workforce will be decrease substantially. The
lack of people in the workforce means that the burden of the Social Security and
Medicare payments will fall on fewer people. The combination of the reduced workforce
and the national debt creates a foreboding picture of the economic future of America.
America cannot sustain its deficit spending because the world will not continue to
let America borrow money to finance its spending (Feldstein 114). Right now the US
economy receives goods and services from other countries and gives back debt. In 2007,
America received 708 billion dollars more in goods and services than it sent out to the
world (114). America can turn this trend around by exporting more than it imports. For
this to happen, the dollar needs to depreciate (116). This will make US exports more
appealing to other countries. The depreciation of the dollar will also disincentive
Americans from buying imports, helping America lower the deficit and aiding to stop the
debt from increasing (116). The Senate voted on October 11, 2011 to stop China from
artificially lowering their currency to help increase the value of the yuan relative to the
dollar (Remnimbi (Yuan) 1). The bill will allow the U. S. government to apply duties on
imports from China, which will discourage imports and help the deficit therefore slowing
down the rising national debt.
However, America has had debt problems before and recovered. In 1946,
America built up a debt of 109 percent of its GDP and eventually paid off its debt (Bittle
135). America’s debt at its current levels has reached 100 percent of its GDP. When
Greece’s economy crashed in 2010, its debt had reached 115 percent of its GDP (135).
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However, as long as investors keep putting their money in U. S. Treasury bonds, the
economy will be stable. In a survey of college students, participants voted that they
wanted America’s economy to most emulate China’s instead of Germany, France,
Sweden, England, Japan, Canada, or Ireland’s. China won because it has invested in other
economies and has no debt, something the participants want to see in America’s
economy. In the 1980s, America borrowed furiously from foreigners, crediting a huge
current account deficit (Flying on one engine 3). However, their deficit came down
because of a controlled drop in the dollar and because Germany and Japan’s economies
strengthened, creating more demand for goods (3). Debt is not always a signal of a bad
economy. If a country is using the borrowed money to create capital, then their economy
will grow and be able to produce more and receive more revenue from taxes. Argentina
had a debt crisis in 2001 with a debt of only 63 percent of GDP, while Japan has a debt of
more than twice the size of its economy but Greece is a much more competitive economy
(Bittle 136).
The U.S. government can tax and print more money to finance the debt. There
are consequences to paying off the debt in thee ways. Printing more money would create
inflation, while taxing more might increase the savings rate and shrink the economy
because investment will decrease. The Federal bank invested 400 billion dollars on
September 22, 2011 in long-term Treasury securities to drive down interest rates to spur
economic growth ("Economic Crisis and Market Upheavals 1). By reducing the interest
rate, the Federal Reserve reduces the cost of borrowing for corporations and consumers.
This encourages investment in capital and fosters economic growth. Economic growth
can create more tax revenue and help reduce the debt problem.
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America’s economy is still safer than most investments in the world (Flying on
One Engine 3). Since 1995, about 60 percent of the growth in world output has come
from America. America’s spending creates this extraordinary contribution to the world
economy. The decrease in U. S. spending will mean other countries will have to spend
more to continue to allow all of the production that is occurring in the world economy
right now. Americans will start to save more because of the national debt and their own
debt. American consumers’ indebtedness is currently growing twice as fast as their
incomes (2). However, American college students have a good grasp on the national debt
crisis. I conducted a survey of American college students, asking what did the Federal
government spend the most on in 2009. National defense won every category and was
the Condorcet winner. The Federal government spent the most on Social Security, not
national defense. The answers to this question illustrate how a democratic voting system
can yield an unfavorable or wrong outcome. The poll did put Social Security and
Medicare, which the government spent the most and third most money on, at numbers
two and three for most of the voting systems. This question displays that the people I
surveyed had a respectable grasp on what is causing the debt.
The economy is trending towards harder times, however, there are many ways the
economy can right itself without collapsing. Raising taxes, cutting spending, and
inflation can make the debt much smaller. Also, the dollar is a vehicle currency, so it is
perceived by other countries to be a reliable indication of the exchange rate. As long as
investors believe that America is a safe market, the U. S. can withstand the debt it has
created. Europe and many other countries have much more serious economic turmoil
than the United States right now (Europe’s Financial Crisis Intensifies 1). In another one
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of my surveys, I asked what states people most wanted to live in and what states people
thought had the most debt. I gave California, North Carolina, Florida, Iowa, New York,
Utah, Ohio, Utah, Massachusetts, Wisconsin, Texas, Hawaii, Michigan, Kentucky and
Colorado as choices. The amount of debt did not seem to significantly change the order
of the states people wanted to live in. California was the winner by all of the voting
systems and was the Condorcet winner. Many of the states with significant debt stayed at
the top of the list, while some states with low debt were at the bottom of the places where
people wanted to live.
I believe the debt crisis is serious, however, I do not think America is going to
approach the same level of economic turmoil as the debt crises of Argentina or Greece.
There are many ways for America to improve or fix its economic problems such as
raising taxes, lowering spending, increasing exports and decreasing imports, and
inflation. The American economy is creating a huge demand for world products and has a
very powerful economy. Finally, the rest of the world seems to be having economic
turmoil as well (1) and America’s economy seems to still be considered a safe place to
invest.
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Bibliography:
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<http://useconomy.about.com/od/fiscalpolicy/p/US_Debt.htm>.
Barbieri, Rich. "National debt: A pop quiz." CNN. n. page. Print.
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ndex.htm>.
Bittle, Scott, and Jean Johnson. Where Does the Money go? Your Guided Tour to the
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"Flying on one engine." Economist. n.d. n. page. Print.
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