ECON312N Principles of Economics
Week 7 Discussion
The Federal Deficit and National Debt
Read/review the following resources for this activity:
Textbook: Chapter 18, 20
The federal debt is symptomatic of the nation’s persistent Budget Deficits as the National Debt is the accumulation of Budget Deficits.Deficits grew steadily during the Great Recession when there was a significant shortfall in government revenue, which required that the government pursue an expansionary Fiscal Policy to stimulate the economy. The recession is now over, but the Trump administration, at least for the first two years, pursued deficit spending. In a contribution to Forbes magazine, Chuck Jones (2018) points out that the U.S. Federal deficit was $587 billion in Obama’s last year in office, and it grew to $666 billion in the first year of Trump’s presidency. The Trump Administration’s Tax Reform plan and the two-year bipartisan budget, which passed in February 2018, are estimated, by many accounts, to cause the Federal Deficit to exceed 1 trillion dollars by 2020 (Jones, 2018). The implication of this growing deficit is a further increase in the National Debt.
From 1965 to through 2018, there has been a persistent increase in the Federal Debt. This trend became more pronounced during (and in the aftermath of) the recession of 2008-2009. As shown on Figure 1, in September of 2017, for example, the National Debt rose to 20.24 trillion U.S. dollars. This disturbing increase in the Federal Debt is likely to increase the per capita debt burden for each American citizen. According to Statistica (2018), if the debt owed in 2016 were distributed to every American citizen, the amount owed per capita would be 60,470 U.S. dollars.
Figure 1: Federal Debt: Total Public Debt
As the U.S. Federal Debt increased over the years, so did the Federal Debt as a percentage of GDP. From 1965 to 2018, there has been a general increase in the Federal Debt as a percentage of GDP. Remarkably, this increase was very pronounced during (and in the aftermath) of the recession of 2008-2009, after a brief decline from 1995 to 2002. As shown on Figure 2, in the fourth quarter of 2017, the Debt to GDP ratio was 104%. The ratio compares what the U.S. owes to what it produces, and it serves as an indication of the U.S.’s ability to pay its debt. This number can also be interpreted as the number of years it would take for the U.S to pay back its debt if the nation’s GDP is used entirely to pay back its debt (Statistica, 2018).
Figure 2: Federal Debt: Total Public Debt as a Percent of GDP
Deficit hawks in Congress and conservative activists who railed against President Barack Obama’s spending plans called the GOP debt explosion “dangerous” “immoral” and “a betrayal.” American Conservative Union chairman Matt Schlapp warned the Republican-controlled Congress not to underestimate the impact of responsible spending for voters. In fact, President Trump, whose aides participated in the negotiations and the crafting of the Budget, had a little bit of buyer’s remorse when the Budget was presented to him. In a morning tweet, he threatened to veto the Budget, but later signed it. The Washington Post (2018) summed it up this way “Just hours after threatening a veto, President Trump said Friday afternoon that he had signed a ‘ridiculous’ $1.3 trillion spending bill passed by Congress early Friday, averting a Government Shutdown” (para. 1).
The spending situation has become so alarming that there are renewed calls – from both sides of the political aisle – for a Balanced Budget Amendment to the constitution based on the premise that unless restrained by constitutional rules, legislators will run budget deficits and spend excessively, especially if this would help their reelection efforts. Another basis of this argument is that politicians do not like to levy taxes on constituents, but like to spend on projects favored by their constituents or big political donors. This situation, they argue, creates an incentive structure that makes budget deficits almost inevitable.
Initial Post Instructions
For the initial post, address the following:
Do you agree that the constitution should be amended to include a Balanced Budget requirement? Why or why not?
If you agree with a constitutional amendment, can you identify one reason why some people may be opposed to it? What proposals would you make to allay the concerns of those people?
If you disagree with a constitutional amendment, can you identify a line of argument – made by the proponents of the constitutional amendment – that you find compelling? What do you find persuasive about that line of argument?