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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 today1. 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. However, I believe that if the United
States makes changes its spending policies, then it can avoid economic disaster.
I conducted a survey of seventeen Duke University students, asking people to
rank their opinion from one to ten of the severity of America’s debt problem. A plurality
system of voting is when one candidate gets the most first place votes. Instant runoff
voting is where the candidate who gets the lowest amount of votes is eliminated until one
candidate is left. The rest of the systems require a ranked ordering of the candidates.
The borda count system of voting is where the each candidate gets a certain amounts of
points corresponding to the position the voters placed them. The least worst defeat
system of voting is where the candidate with the lowest worst defeat wins. The ranked
pairs voting system is where a system of equalities decides who wins based on who has
the greatest victories. The person with the highest score wins. Ten was the plurality
winner, top two runoff winner, and IRV winner. However, seven was the borda count
1
www.usdebtclock.org/
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winner, least worst defeat winner, and ranked pairs winner. Also, seven was the
Condorcet winner. These voting methods illustrate 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.
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. This
means that the interest on the debt is going to foreign markets. If U. S. citizens owned
the debt then the interest on the debt would be going to American markets and would
help stop the recession. Also if foreign investors wanted their money back, they could
create a panic in America because the government would not have the money to pay
them2. They could start a ripple effect where domestic investors start selling their U. S.
Treasury bonds3. If investors stop buying 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 Americans4. 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 extremely hurt the economy because America is already experiencing a
recession.
Another troubling issue regarding the debt is the interest America must pay to
people or governments to whom the American government owes money. The interest on
2
Bittle, Scott, and Jean Johnson. Where Does the Money go? Your Guided Tour to the
Federal Budget Crisis. Pg 12-13
3
Ibid. Pg 13
4
Ibid. Pg 29
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the debt will eventually become incredibly onerous on the American economy5. America
paid 80 billion dollars in the first four financial months of 20116. Last year alone, the
cost of interest rose by 13.2 percent7. 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 nation8.
A trade deficit is how much a country’s imports surpass its exports. 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 taxes9. In 2009, the government spent 683 billion dollars on
Social Security, 661 billion dollars on national defense, and 430 billion dollars on
Medicare10. 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 means that the government will not
have the money to cover Social Security and Medicare benefits for the people who want
5
"Flying on one engine." Economist. n.d. n. page. Print. Pg 2
Barbieri, Rich. "National debt: A pop quiz." CNN. n. page. Print.
<http://money.cnn.com/2011/02/08/news/economy/national_debt_interest_costs/index.ht
m>. Pg 2
7
Ibid. Pg 1
8
"Flying on one engine." Economist. n.d. n. page. Print. Pg 2
9
Ibid. Pg 2
10
Bittle, Scott, and Jean Johnson. Where Does the Money go? Your Guided Tour to the
Federal Budget Crisis. Pg 93-97
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to retire11. 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 spending12. Right now the US economy
receives goods and services from other countries and receives debt. In 2007, America
received 708 billion dollars more in goods and services than it sent out to the world13.
America can turn this trend around by exporting more than it imports. For this to happen,
the dollar needs to depreciate14. 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 its trade deficit and aiding to stop the debt from
increasing15. The U. S. government has already taken steps to help depreciate the dollar
by increasing the value of the yuan relative to the dollar. 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 dollar16. The bill will allow the U. S. government to apply
duties on imports from China, which will discourage imports and help the trade deficit
therefore slowing down the rising national debt.
11
Ibid. Pg 126
Feldstein, Martin. "Resolving the Global Imbalance: The Dollar and the U.S. Saving
Rate." Journal of Economic Perspectives. n. page. Print. Pg 114
13
Ibid.
14
Ibid. Pg 116
15
Ibid.
16
"Renminbi (Yuan)." New York Times. n. page. Print.
12
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However, America has had debt problems before and recovered. In 1946,
America built up a debt of 109 percent of its GDP and was able to lower the debt to 25.3
percent by 197517. 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
GDP18. However, as long as investors keep putting their money in U. S. Treasury bonds,
the economy will be stable.
I conducted a survey of ten Duke University 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. I believe that 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 deficit19. However, their trade deficit came down
because of a controlled drop in the dollar and because Germany and Japan’s economies
strengthened, creating more demand for goods20. Debt is not always a signal of a bad
economy. Japan had a debt of more than twice the size of its economy but Greece is a
much more competitive economy21. However, Argentina had a debt crisis in 2001 with a
debt of only 63 percent of GDP22.
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.
17
Bittle, Scott, and Jean Johnson. Where Does the Money go? Your Guided Tour to the
Federal Budget Crisis. Pg 135
18
Ibid.
19
"Flying on one engine." Economist. n.d. n. page. Print. Pg 3
20
Ibid.
21
Bittle, Scott, and Jean Johnson. Where Does the Money go? Your Guided Tour to the
Federal Budget Crisis. Pg 135
22
Ibid.
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The U. S. government has many tools to help it fix its debt crisis. 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 growth23. 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.
America’s economy is still safer than most economies in the world24. 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 incomes25. However, Duke
University students have a good grasp on the national debt crisis.
I conducted a survey of seventeen Duke University students, asking what did the
Federal government spend the most on in 2009. I gave them the options of Medicare,
23
"Economic Crisis and Market Upheavals ." New York Times. n. page. Print.
<http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.html?s
cp=2&sq=america debt&st=cse>.
24
"Flying on one engine." Economist. n.d. n. page. Print. Pg 3
25
Ibid. Pg 2
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National Defense, Social Security, Energy, Medicaid, Interest on the Debt, Foreign Aid,
and Education. National defense won every category and was the Condorcet winner.
The Federal government spent the second most on 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 now26. Greece may default on its debt or require a bailout,
while Portugal and Spain also appear to be having financial troubles27.
In another one of my surveys, I surveyed eight Duke Students 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.
"Europe’s Financial Crisis intensifies: Problems in Portugal, Greece and Spain Weigh
Heavily on Global Economy ." MSNBC. n. page. Print.
27
Ibid.
26
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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 well28 and America’s economy seems to still be considered a safe place to
invest. I believe that America will be able to fix its economic situation, however, it will
require a significant change in the way the U. S. government is spending.
28
Ibid.