Reference no: EM132158317
Policy Implications of Government Debt
Introduction
In the United States, only the national government has the power to create money to meet current operating expenses. State and local governments sell bonds to raise the money needed for long-term capital projects such as highways and bridges. These state and local bonds are backed with their government's taxing power or with the revenue to be earned by the entity that is created by the bond. The spending money comes from investors. The national government, by contrast, can sell securities backed by its power as a nation, "the full faith and credit of the U.S. government," to raise money needed to finance deficit spending. Some economists, such as Nobel Prize-winner Paul Krugman (2014), say that as long as the debt remains in proportion to the gross domestic product (GDP), its growth is not a matter of serious concern. For example, if the deficit grows 2% a year while the economy, as measured by GDP, grows 2% a year, it is not a matter of concern.
This week, you will investigate the implications of government debt in the realm of public policy. You will identify uses of government debt and evaluate the implications of the national debt and deficit financing at the national-government level.
A Balanced Budget Amendment
As you read in the U.S. News & World Report webpage listed in this week's Learning Resources, note that some political leaders and scholars believe that the U.S. Constitution should be amended to require that the national government maintain a balanced budget each fiscal year. The sum total of expenditures would not exceed the sum total of projected revenues. If the economy went into a downturn and revenues declined, Congress would have to raise taxes or reduce expenditures. Others do not believe that the deficit is the problem. They believe that spending needs to be curtailed and taxes increased, but within a framework that allows the government flexibility in times of crisis such as war or economic recession. For this Discussion, review the week's Learning Resources and consider the contrasting arguments regarding this proposed amendment and its implications for public policy and finance.
Post by Day 3 an explanation of policy implications of a balanced budget amendment. Your explanation should respond to the following questions:
What would be the consequences of raising taxes or reducing expenditures under these circumstances? Justify your response.
Is it possible to design a balanced budget amendment that would not force the government to cut back expenditures or raise taxes in an economic downturn? Why, or why not?
Be sure to support your post with specific references to the Learning Resources and other peer-reviewed sources and provide full APA-formatted citations for your references.
Read your colleagues'' postings.
Assignment
Blog: American Government Debt and Foreign Creditors
As Hyman (2014) illustrates, nearly 60% of the U.S. national debt is held by foreigners (p. 459). This is because the United States and the dollar continue to be the safe haven for foreign investors. According to the National Bureau of Economic Research, foreigners and their governments invest in U.S. securities "to benefit from the highly developed, liquid, and efficient U.S. financial markets, and from the strong corporate governance and institutions in the United States" (Picker, n.d., para. 5). While this provides the American consumer with cheap and plentiful goods, it complicates relationships between the United States and the nations holding our debt, such as China. Brookings Fellow Eswar Prasad (2010) describes this problem as follows: "The U.S. receives a large volume of low-cost imports from China and has also gotten help in financing a significant part of its budget and current account deficits....The prospect of economic and political disputes ratcheting up has been elevated by an increasing imbalance in this relationship" (para. 5).
Post by Day 5 an evaluation of economic issues inherent to borrowing by the U.S. national government. Your evaluation should address the following questions:
Why do foreign governments invest in U.S. Treasury securities?
Which foreign governments are the major investors in U.S. Treasury securities, and what political issues does this raise?
What are the implications for U.S. foreign policy?
What are the implications for U.S. trade relations with the nations holding the debt?
What are the implications for the average consumer?
Be sure to support your post with specific references to the Learning Resources and other peer-reviewed sources and provide full APA-formatted citations for your references.
Attachment:- Resources.rar