TheU.S. National Debt
Thenational debt of the U.S. refers to the amount that is owed by thefederal government of the country. The U.S. national debt is verylarge since it exceeds the gross domestic product. A significantamount of the debt emanates from the efforts of them governmentattempting to reduce the impacts of the financial crisis, an anemicrecovery, and recession. The national debt problem commenced early in1970 when the government decided to start increasing its spendingsubstantially without having a corresponding increase in the taxrevenue.
Accordingto Feldstein (2016), the U.S. economy is currently in decent shape.It is at full employment where the entire joblessness rate at 5% anda very low rate of unemployment amid college graduates which standsat 2.5%. Furthermore, the inflation rate is near zero but has beendisturbed by the sharp fall in energy prices. The progress of GDP in2016 may be narrowed by the lack of superfluous capacity in theeconomy instead of the absence of demand. However, looking at thelong-term view of the economy, the volatile growth of the federaldebt in the country poses the most serious debt in case no policiesto control the further growth of the national debt are considered.The proportion of the federal debt to that of the gross domesticproduct has doubled in the last 10 years from a point level less than40%, which dominated for some time before the current recession to75% of GDP.
Ithas been suggested by the Congressional Budget Office that thecurrent guidelines will make the ratio of national debt to GDP riseemanating from an increase in the deficit. One of the reasons forthe increase in the deficit in the future is that the standardizingof rates of interest will augment the charge of interest on thefederal debt (Feldstein, 2016). The Congressional Budget Office (CBO)projects that, the interest on the national budget is likely to risefrom 1.2% of GDP in 2015 to approximately 2.8% in 2025 a move thatwould raise the annual deficit by around 1.6 percentage points.Another motivation for the increasing level of the financial plandeficit emanates from the rising outlay of transfer payment toseniors in the middle-class. The CBO makes an estimation that thesocial security cost is likely to rise from the current 4.9% of GDPto about 5.7% of GDP in the following decade and to approximately6.2% of GDP by the year 2040. With the rising trend in deficit, thenational debt will also grow. The federal debt has been projected tobe 100% of GDP by 2039. However, it may even grow larger (Feldstein,2016).
Thesubstantial increase in the U.S. national debt emerges as a seriousproblem because servicing the debt requires an increase in taxes,which must bring efficiency outlays on the economy. Also, since morethan half of the federal debt is held overseas, paying interest onthe debt needs a lesser real value for the dollar. This would have aneffect of lowering the living standards in the U.S. and making termsof trade worse. Furthermore, the higher debt can crowd out privatecapital creation, thus lowering real incomes.
Althoughits growth is significantly high, the debt to GDP ratio can bemitigated through raising the future amount of GDP and reducing thesize of the anticipated government debt. A sustainable augment in theforthcoming GDP may be attained through adjustments in tax policies,regulations, and federal initiatives of training (Feldstein, 2016).
Tradehas necessitated the opening up of different areas of the globe.Without trade, it could have been difficult for countries to obtainservices or commodities that they do not have the ability to produce.In simple terms, trade is the exchange of commodities as well asservices between two or more nations (Baiynd, 2011). In production,one country may have certain resources required for the generation ofa given commodity however, it may lack some of the materials orservices for the development of the product. In such a scenario, thenation may opt to obtain the raw materials it does not have fromanother country through a trade agreement. In trade, comparative andabsolute advantages are very critical because they help countries touse resources efficiently and necessitate trade. Absolute advantagedescribes the ability of a country to produce superior commoditiesand services compared to others originating from its capacity.However, the notion of comparative advantage is grounded on theconcept of opportunity cost. In case the opportunity cost ofselecting to produce certain merchandise is lower for a countrycompared to that of others, then the nation is indicated to have acomparative advantage in the generation of the commodity. These twoconceptions drive global trade since countries tend to create goodswhich they possess a comparative advantage in generating and acquirethe rest from other countries.
Inthe exchange of commodities and services, tariffs, subsidies, quotas,and prohibitions have been applied by domestic countries as a way ofregulating trade. However, free trade does not protect or isolate acertain region from taking part in trade with one or more nations.There has been an argument, where some policymakers support the ideaof free trade while others have a differing opinion (Baiynd, 2011).Economists who support the idea claim that the application of tariffsand other restrictions tend to reduce the economic welfare ofcountries. Countries are better off with free trade compared to whenthere are policies that discourage or restrict trade. Allowing tradeis critical in influencing the income of a country as well as itswell-being. For instance, mitigation of trade barriers allows theexchange of ideas and spread of technology, which are vital to anation’s development agenda.
Tradecan be indicated to be beneficial because it helps countries inobtaining services and commodities that it could have otherwise notobtain due to their inability to produce them or lack of resources.Also, trade helps in encouraging competitiveness as countries engagein trade, they exchange ideas that aid them to improve their productsthat in turn enhance the competitiveness of the merchandise produced(Baiynd, 2011). Furthermore, it is important in economic progress asit helps a domestic country to obtain foreign currencies, which canbe used for development programs. In addition, trade is beneficial asit tends to encourage innovation.
Globalizationis considered a multidimensional concept because it covers differentareas such as social, economic, and political (Ritzer, 2015).Economic globalization describes the growing interdependence ofinternational economies because of the mounting scale of cross-bordertrade of merchandise and services, the flow of global capital as wellas the broad and swift spread of expertise. It usually mirrors theprogressing growth and conjoint integration of market frontiers andis considered as a permanent tendency for economic progress in theentire globe. The main influencing forces of economic globalizationare marketization and rapid growth in information systems.Multinational corporations have become the primary transferors ofeconomic globalization. These firms shape production globally anddistribute resources based on the tenet of profit maximization. Theglobal expansion of the multinational organizations is reforming themacroeconomic elements of the process of the global economics.Globalization of the financial segment has emerged as the mostquickly growing and persuasive element of economic globalization. Thefield of global finance cannot be ignored since it has a criticalrole in serving the demands of the transnational trade as well asinvestment activities. The monetary market can be indicated as theonly one that has accomplished the real logic of globalization.
Nationsthat are developed have been deemed to play a significant duty in thepractice of economic globalization. These nations have been in aposition to support the idea of globalization through facilitatingforeign direct investment and huge exports. Furthermore, they take aleadership role in establishing policies for global economicexchanges. The developed nations take advantage of their role, whichenables them to support and control the progress of globalization.
Globalizationhas been considered an important part of economic growth. Infacilitating the process of growth, integration is a vital element.Integration is crucial since it promotes the flow of knowledge andideas across borders (Ritzer, 2015). It is through the use of theknowledge and ideas obtained from other countries that people in aneconomy are capable of producing quality products because they are ina position to apply new methods, materials, or even technology. Forinstance, due to integration, technology in different areas havespread to various countries, where they have been used in theproduction process to add value to commodities, which end up fetchingmore revenues that are used in enhancing the living standards. Also,integration has the ability to afford innovators a greater potentialmarket, despite exposing them to competition from foreign rivals.Although globalization leads to more competition to the domesticfirms, it brings about innovation that helps organizations to have abroad market potential since firms use the innovations to competeinternationally. This is vital for economic growth since countriesare likely to reap big from the multinationals. In addition,emanating from globalization, countries have been in a position toshare important ingredients of economic growth such as favorablepolicies and technology, which fully support the idea of economicgrowth (Ritzer, 2015). Moreover, globalization has promoted tradeamid countries, which has, in turn, resulted in countries obtainingforeign currencies that they utilize for economic development.
Despiteglobalization having positive impacts on the economies, it also hassome negative influences. Globalization has opened countries tothreats. As technology is spread from one place to another, it hasposed the threat of cyber terrorism. Furthermore, because ofglobalization, some firms, especially in the developing countries,have not been in a position to operate emanating from stiffcompetition that they face from the international companies. This hasacted as a threat to the existence of small firms operating in thedomestic markets.
Theseare set of government policies and guidelines that aid in the controlor stimulation of the aggregate indicators of an economy.Macroeconomic policies are usually implemented by two set of twotools, which are the monetary and fiscal policy. These two forms ofpolicies are discussed in the following paragraphs.
Thispolicy deals with the adjustment of the supply of money in an economyin an attempt to realize stabilization. In the long-run, the outputis fixed, which implies that any changes in the money supply wouldonly result in a price change (Hoover, 2012). However, in theshort-run, wages and prices do not adjust immediately this meansthat any modification in the money supply is likely to influence theactual production of commodities and services in an economy. Changingmonetary policy has significant impacts on aggregate demand, and thusinfluences both prices and outputs. When the central bank desires tochange the monetary policy, it uses open market operations. There aredifferent ways of transmitting policy actions to the real economy,but the most common is through the interest rate channel. Whenapplying the monetary policy, the central bank may tighten or loosenthe interest rates of borrowing resources is in order to increase ordecrease the money supply in an economy. Another way of applying thepolicy to the economy is through the exchange rate channel, whereexports may be made expensive and imports cheaper. The policy canalso be transmitted through the balance sheet and bank lendingchannel.
Thispolicy deals with the application of taxation and government spendingto impact the economy (Hoover, 2012). In promoting strong andsustainable growth, as well as mitigating poverty, governments applyfiscal policy. Historically, the reputation of this policy as amacroeconomic instrument has decreased. During the Great Depressionand the stock market crash, policymakers used to push for a moreproactive role by the government. However, in recent years,policymakers have called for the use of the fiscal policy, especiallywith the financial crisis.
Inapplying the fiscal policy, governments impact the economy throughadjusting the degree and kinds of taxes, the level, and arrangementof spending, as well as the level and form of borrowing. Governmentshave the ability of directly and indirectly influencing the manner inwhich resources become utilized in an economy. Fiscal policy can beexpansionary or tight it is expansionary if it augments total demanddirectly through increasing government level of spending.Alternatively, the policy is tight if it decreases aggregate demandthrough decreasing government spending.
Inresponding to the financial crisis and its impacts, most countrieshave resulted to using the fiscal policy, where they focus onstabilizers and fiscal stimulus. Stabilizers usually act as taxrevenues while spending levels vary and do not rely on exact actions,but function according to the business cycle (Hoover, 2012).Automatic stabilizers are associated with the government size andtend to be vast in developed economies. Governments have to time theappropriate period to apply taxes or government spending to aneconomy so as to have the desired outcome. Although the use of thefiscal policy has been seen as effective in resolving the effects offinancial crisis, it has led to a situation of increasing public debtemanating from the increased spending without corresponding taxrevenue.
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Ritzer,G. (2015). Globalization:A basic text.Chichester, West Sussex Malden, MA: John Wiley & Sons, Inc.
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Coughlin,C.C. 2002. The Controversy over Free Trade: The Gap betweenEconomists and the General Public”. Federal Reserve Bank of St.Louis.
Mankiw,N. Gregory. 2016. “Why Voters Don’t Buy it When Economists SayGlobal Trade is Good,” New York Times, 07/29/2016.
Grossman,Gene M. and Elhanan Helpman. 2015. “Globalization and Growth”.American Economic Review: Papers & Proceedings, 105(5): 100–104