National Debt Reduction
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The complex issue of national debt reduction has been around since George Washington first became president of a new republic founded on principles of freedom and equality. At the time, the young country was little more than a loose coalition of independent states whose leaders were wary of centralized government. The tension between state rights and the role of a federal government caused many debates, disagreements, and compromises as these wise and thoughtful leaders hammered out important issues. One of their debates concerned the money that the fledgling government owed because of expenditures during the War of Independence from Great Britain. The founding fathers worked hard, though they often disagreed on the particulars, to develop sound national debt reduction policies. It appears they were successful since the United States had the credit standing to borrow the money needed to make the famed Louisiana Purchase. This aggressive land acquisition doubled the geographic size of the nation in one fell swoop. The early administrations weren't just fiscally conservative; they were frugal. This frugality contributed to the country's rapid financial stability.
Now that the country has been around for over two hundred years, historians and economists can look back on the nation's economic ups and downs with the benefit of hindsight. Throughout history, the federal debt has increased during times of war and has decreased during times of peace. This pattern has shown itself again and again with the War of 1812, the Civil War, and in more modern-day conflicts. As one would expect, the increases during war climb rapidly and it takes a lot more time, regardless of the national debt reduction policies that are put in place, for the decreases to become evident. King Solomon wrote that: "The words of wise men are heard in quiet more than the cry of him that ruleth among fools. Wisdom is better than weapons of war: but one sinner destroyeth much good" (Ecclesiastes 9:17-18). This is an unbending principle in almost every aspect of life stability (which takes time and effort to achieve) can be destroyed, totally and quickly, by one destructive act. Similarly, years of economic prosperity can be quickly eroded by outside events.
The complexities of national debt reduction include such issues as taxes, federal spending, and the economic consequences of raising and lowering both. When such brilliant, far-seeing men as the country's founding fathers can disagree on economic policies, it's no wonder that well-educated and astute economists can evaluate the same raw data and reach different conclusions. Additionally, many people are confused about the difference between the national debt and the budget deficit. They are not the same thing. The budget deficit is the difference between revenue and expenditures in a given time period. The national debt is the total of the country's obligations in the form of investment products offered to investors. When a person purchases Treasury bills, Treasury notes, or Treasury bonds, that person isn't just an investor, but also a creditor to whom the United States owes money.
Basically a national debt reduction plan is like a teeter-totter with taxes on one side and spending on the other. To have more money to reduce obligations, governments can either raise taxes or limit spending. But this creates confusion and controversy because lower taxes actually stimulate the economy and can increase the overall revenue into government coffers. Instead of having to send hard-earned money to the government, citizens can use it to purchase goods and services, to launch small businesses, and to invest in the stock market. Historically, lowering taxes also has less inflationary impact on the economy than the option of less spending.
Some economists and policymakers make the argument that discussions regarding national debt reduction policies focus on the wrong number that the size of the debt isn't as important as the ratio of the amount in comparison to the gross national product (GDP). The GDP is calculated by placing an actual dollar value on all the goods and services produced in a specific time period. Economists compare the ratio of the national obligation to the GDP for different time periods to influence policy decisions regarding taxing and spending. To gain a better understanding of some of these concepts, it can help to think of households instead of countries and family budgets instead of federal ones. The national obligation equates to the total amount of money a household owes creditors. The budget deficit equates to the difference between a family's annual income and the total of their annual expenses comparable to a small business's profit and loss statement. Just as families and households who have monetary obligations have to come up with strategies to get out of debt, countries need to have national debt reduction policies to avoid financial chaos.
The argument for focusing on the debt to GDP ratio also is easier to understand when placed in terms of a household budget. For example, let's say that five years ago a particular household owed a total of $50,000 to creditors and had an annual income of $100,000. That calculates to a debt-to-income ratio of 50%. But let's say that today this same household owes a total of $100,000 to creditors and has an annual income of $300,000. The amount of the obligation has doubled, but the percentage has decreased to 30%. Similarly, rising national debt is offset by an increased GDP. Given all these complexities, it's not surprising that national debt reduction is a controversial topic with no simplistic answers.
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