Is Debt a Good Thing for the Economy? Essay Example

Debt is an essential component of the economy due to its role in helping governments to meet government shortfall in raising the required revenue for public expenditures. The debt arises as a result of deficits in financing government budgets over a given fiscal year. Each year , the level of debt increases with current figures showing the US deficit in 2017 stood at 3.4% of GDP, only second-highest to Japan (Tully fortune.com; The Economist). The continual increase of US debt has generated intense debate among the public, politicians, and economics. Some argue that the trend of increasing public debt could run down our economy while others suggest that increased deficits are necessary for consistent economic growth. So, is debt running down the economy? A closer examining of the relationship between debt and economic performance suggests that increasing debt is beneficial to the economy; however, how the debt is raised and used is what matters most.

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Increasing the value of deficits has the potential to slow down economic growth due to the high debt payment of obligations. As of today, the US government commits 8.1% of revenues to debt service, and with estimates suggesting that the federal government will be paying more than $700 billion in 2019 to meet debt obligations (Tully; Andrews). This is likely to weaken the economy by crippling vital public projects that spur economic growth. When government's investment in the economy is declines, it implies that the overall expenditures in the economy would decline, resulting in poor performance outcomes of the economy. As a consequence, many citizens would be negatively affected if the economy does not perform well.

At the same time, opponents cite the possibility increased inflation as a consequence of deficit spending. When money grows faster than the output of the economy, inflation is likely to set in (Schreyer et al.). An occurrence of inflation means that people with fixed incomes would be adversely affected and also the potential of savers would be eroded in a significant way as the value of money goes done, negatively impacting on the purchasing power of the general public. The increase in inflation can also lead to increased demand for wages among workers as a way of seeking compensation for the reduced value of their salaries and wages. Such outcomes can cause long-term problems for the economy. However, overwhelming evidence suggests that debt actually has a significant net benefit to the economy under certain conditions.

Increasing debt through budget deficits is critical in stimulating employment creation. This can be seen after the 2008 financial crisis. In response to the crisis, the federal government expanded its public expenditures through debt as a way of stimulating the economy after the recession. Many renowned economists such as Paul Krugman argued that increasing deficit spending was an effective way of creating new jobs for the economy and spur economic growth (Krugman). It was anticipated that the creation of jobs would offer the federal government more opportunities to raise revenues through taxation. The robust performance of the US economy in the subsequent years after the recession affirm that increasing debt for public spending can offer several benefits to the economy. As Robert Eisner argued in the 1980s, increasing debt though the creation of budget deficits is the sure way of cushioning future generations against financial shocks (Schreyer et al.). Therefore, raising public debt to finance public projects is desirable.

Public debt should also be encouraged since the United States borrows at friendly rates. Since most global economies price their goods and services in dollars, it means that using the dollar as the country's currency is advantageous because the US can always borrow from the international market at cheap rates to finance public projects without compromising the ability of the private sector at home to access credit for private investment. When money borrowed at such relatively less expensive rate, the government makes savings which can, in turn, be translated into increased saving among the public (Tully). This position offers the country a unique strength as it helps to promote investment thereby offering better benefits in place of incurring opportunity costs for fearing to borrow to finance government expenditures.

Whatever side one identifies regarding the issue of increasing public debt, what matters is how money is collected. That is to say, the biggest threat the US economy faces today is the declining saving capacity of Americans resulting from punitive tax measures that discourage saving in the private sector. According to Schreyer et al., focusing too much on budget deficits and the ballooning debt diverts the attention from what really matters in creating wealth for the American people: saving and investment. This boils down to the manner in which the federal government collects money from people and businesses. For instance, eliminating many deductions can increase savings and spur investment (Dedousis). Thus, tax cuts would encourage private savings and private investment. Regarding returns, it is more beneficial to implement a tax cut to enable the private sector to invest more in the economy. A rise in private sector investment can translate into improved productivity. When productivity is boosted in the economy, the ability for the government to collect more taxes is increased.

Another challenge with increasing public debt in the name of boosting economic performance lies in the inability of the public sector to create the right environment for the economy to create jobs and improve productivity. For centuries, the free market economy has proved to be a genius in creating wealth. For instance, if one is given $100 billion to invest, it would be prudent to channel the money into the private sector and not the public sector. In other words, enabling the formation of more Googles and more Microsofts is the way to go. The problem with putting money in the public sector is that the sector is full of inefficiencies compared to the private sector (Schreyer et al.). Inefficiency means that there is a lot of wastage of public resources that takes place, denying the economy the money it needs to create jobs and enhance productivity. For instance, what does the establishment of a hospital in Afghanistan using public money raised through increased debts has to do with the performance of the US economy? As argued by Tamny, the problem of increased debt is the spending and not how the expenditure is made possible.

Conclusion

As a conclusion, it can be suggested that public debt is a good thing for the country. Those who argue against increasing public debt as a method of financing budget deficits fail to acknowledge that increasing public debt means more expenditure which, in turn, increases productivity and job creation. This results from the enhanced ability to save. However, having a huge public debt is not a problem. The problem lies in the way the money is raised though debt and how it is spent as well. Evidence suggests that the government is wasteful and spends money in areas of no priority which undermines the ability of people to save and create new investments. Therefore, a ballooning debt is not a big problem for the US economy; it is how the debt is created and how the funds raised are utilized.

Works Cited

Andrews, Edmund L. "Wave of Debt Payments Facing U.S. Government." The New York Times, 2009.

Dedousis, Athony P. "Unemployment or Debt?" The Harvard Crimson, 2009, www.thecrimson.com/column/full-faith-and-credit/article/2009/12/3/deficit-debt-unemployment-budget/.

The Economist. "The Global Debt Clock." World debt comparison, 2012,

Krugman, Paul. "The Phantom Menace." The New York Times, 2009.

Schreyer, William A. "Is the Deficit a Friendly Giant After All?" Harvard Business Review, vol. 1, no. 1993, 1993,

Tamny, John. "Everything the Hysterics Tell You About Budget Deficits Is Wrong." Forbes, 2013.

Tully, Shaun. "Can America's Economy Keep Up With Its Debt?" Fortune, 2018.