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The Crisis of National Debt
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Essay by:Susan Grossman
George Mason University
Given that the American economy will be in a recession, perhaps a deep recession, when president elect Obama takes office in January, part of a successful administration legacy will be a growing economy. In order to succeed multiple fiscal avenues exist for simulating the economy towards expansion. Monetary policy partnered with fiscal policy can successfully grow the economy and soften the short recession cycles. A fine line is walked by policy experts between promoting economic growth and deficit reduction.
National debt has become a growing concern in the last half of 2008 as many industries, states, and citizens need federal government bailouts in order to survive. The percentage of national debt to the Gross Domestic Product (GDP) has doubled. Forecasters suggest that the debt will to from around 30% of our GDP to around 60% of our GDP. This could have dire consequences on the economic outlook of America for generations with increased inflation and low national savings.
During times of mild recession cycles it may be necessary for the government to interfere with market cycles. In order to soften the effect of a more severe recession, president elect Obama should put into place growth policies that increase government spending in public goods (similar to his just announced overhaul of American infrastructure plan). Increased government spending guarantees money is entering the economy, increases employment and discretionary consumer spending. The type of program the government decides to create can have an affect on the long term growth of the overall economy. Discretionary programs investing in America’s future and public goods will increase employment and stabilize the economy for generations. An example of a program that fulfills these requirements would be a program subsidizing alternative energy. By advancing new forms alternative energy, the government is indirectly promoting science and technology programs at all levels of education. Subsequently, advancing the rapid expansion of that technology creates jobs and decreases unemployment. Extending the 2001 and 2003 Bush tax cut will help further stimulate business. Pumping money into the system will insure an employed workforce with money to spend on goods and services. This may not seem politically wise but necessary in hard economic times.
During a recession cycle, the government should try and stimulate the economy, but during periods of economic growth the government should try to reduce the federal deficit, increase personal and national savings. Many ways exist to repay the deficit. Change in budget and fiscal policy during periods of economic expansion encourages saving which is important for the over all health of the economy to encourage a balanced budget or occasionally a budget surplus.
Repaying the deficit accrued during the recession should be the first step once a recession is over. This should prevent major inflation. Second, the repeal the Bush tax cuts increases revenue lost by the government during periods of economic downturn can once again return. Tax cuts are wonderful for stimulating the economy and should be seen as a temporary solution. Third, budget cuts in all poorly performing programs (determined by PART and budget reforms) or out of date programs are a relatively easy way to increase revenue for other places. Fourth, as an extra achievement many new policies should be looked at during a period of economic stabilization also mandatory entitlements should be reformed during a period of economic prosperity.
There has been a longstanding effort in the government to try and link budget resources with performance results. The Performance Assessment Rating Tool (PART) is a way to achieve this link. With PART, agency progress is rated against performance measures. These evaluations are then used to hold agencies accountable for the performance of their programs. Programs are then rated on a scale determining if they are effective or ineffective. Consistently ineffective performing programs should be looked at twice as a means to reduce the deficit. In order for this to be used as a tool for budgeting expectations need to be defined clearly and outcomes need to be taken into consideration. These performance measures can affect the budget in three ways. First, changes in performance whether good or bad can change budget allocations. Second, a higher standard of performance could affect additional funding. Third, the performance measures could only be one factor in performance measures.
Ideally in the long term the government should work at decreasing the deficit and balancing the budget. Fiscal policy along with monetary policy of the Federal Reserve can work together to achieve this goal. The economic future for 2009 is unknown. What maybe the number one priority of the next administration are a major overhaul and reforming of the financial institutions and budgeting laws providing transparency, accountability, regulation, and an increased sense of stability. America is now at an advantage. The world pegs their currencies to the dollar and America’s monetary policy controls the amount of currency printed. If this balance were to ever change, America would find its self in a situation similar to Argentina.
»A new report finds the main problem in getting the public to deal with our fiscal problems isn't opposition to tax increases or spending cuts -- it's their lack of trust in the government to spend their money wisely.