Balance of Powers: United States of
America
Topic B: The Consequences of Rising US National
Debt
Chair: Devashish Singal
Moderator: Zoya Khan
Vice-chair: Owais Ansari
Crisis Staffer: Samuel Hall
April 10 – 13, 2014
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The Consequences of Rising US National Debt
Introduction:
Since the past few months, the US National Debt has become a critical issue. As
of February 11 2014, the debt stands at $17.26 trillion, and has been rising at an average
rate of $2.40 billion per day since September 30, 2012. There have been numerous
discussions to implement policies to control the rising debt. The federal government has
tried to solve the problem but has been unable to do so because of a divide between the
Democrats and Republicans. There is significant tension between the two parties due to
conflicts over key bills. Some of these include the healthcare bill set forth by the
Democrats and the military defense expenditure written up by the Republicans.
On April 30 2011, the government tried to pay $35 million towards decreasing
the national debt after years of overlooking the rising debt ceiling. More recently, the
impasse between the two parties over appropriation of funds for the fiscal year 2014 led
to a government shutdown between October 1 and October 16 2013.
The massive debt poses a huge concern for the US, as most of it is held by foreign
countries such as China and Japan in the form of US Treasury Securities. A number of
experts worry about the consequences of other countries investing heavily in such
securities. However, there is also a concern regarding US losing its risk-free image if the
debt continues to rise at the current rate.
The escalating national debt has turned into a major liability for the nation and
has left its policymakers with a difficult choice - either deal with the debt and find a
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solution, which implies cutting expenditures in areas such as social services, defense,
infrastructure etc. or raising revenue by increasing taxes, or ignore the debt and default
on its debt obligations. This means that the government needs to discuss the
implications of cutting budgetary allocations in key areas, and Congress needs to stop
raising the debt ceiling while keeping the nation’s expenditures unchanged.
Most importantly, the national debt will adversely affect US’s capability to
maintain its dominance in international security and politics. Every year, the US spends
around $650 billion to fund military projects overseas. But with the debt reaching
alarming levels, there is a high likeliness of reductions in defense expenditures. The
spending cuts will indirectly act as huge impediment in US’s efforts to maintain its
dominance in sustaining world order and peace.
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Background and Current Situation:
One of the largest debt-to-Gross Domestic Product (GDP) ratio increases in
recent times occurred during the early 1980s, when the Federal Reserve raised interest
rates to combat inflation. In response to the growing debt, a bill was passed during
President Ronald Reagan’s first term that raised the debt ceiling to above $1 trillion.
Congress approved more debt ceiling increases in 1985 and 1987. Unfortunately, there
was little change in government expenditures in response to this legislation, and the
deficit continued to grow; simultaneous increases in defense and welfare spending
resulted in the debt-to-GDP ratio reaching an all time high in 1990.
The debt-to-GDP ratio temporarily declined due to a budget surplus during
President Clinton’s second term. However, a recession in the early 2000s, combined
with the Bush tax cuts drastically reduced government revenue. Additionally, US’s
decision to invade Afghanistan and Iraq significantly increased defense expenditures.
The declining revenues and rising expenses served as a double blow and led to a
massive upsurge in national debt. Moreover, the defense spending resulted in
aggressive borrowing from sources inside as well as outside the US.
The situation has continued to worsen during the Obama administration.
Whereas the debt stood at $10 trillion in 2008, it crossed the $17 trillion mark last year.
The economic recession coupled with increasing social services and defense
expenditures are the main factors behind this sharp increase. At this point, the interest
that the government pays to service the debt also accounts for a sizeable percentage of
the US GDP.
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In October 2013, Congress failed to approve its annual budget that led to a
government shutdown. The event impacted the reputation of many representatives and
Congress’s approval ratings plummeted during the days of the shutdown and the
events leading up to it; a Gallup poll from November 2013 revealed that Congress’s
approval rating had fallen into single digits - approximately 9%. The rating was shared
equally between the two political parties, with a 9% approval for Republicans and 10%
approval for Democrats. It is extremely essential to ensure the functioning of
government departments as they hold a direct link to citizens on public payroll as well
as public amenities; during the shut down, employees of most government corporations
were not paid their salaries, and many public services could not be provided for.
The possibility of the government failing to honor its debt obligations, along with
its resolution to always raise the debt ceiling, is impacting the corporate business
environment within the US. Congress has had to make some significant spending cuts
in its attempts to prevent an aggressive debt ceiling expansion and this is damaging the
economy as well as the businesses that comprise it.
Over the past few months, both the parties have proposed solutions to deal with
the debt issues. The Democrats make the argument of increasing tax revenue by
primarily increasing taxes for the wealthy. The Republicans, on the other hand, disagree
with that and continue to encourage and promote an upkeep of business tax incentives.
According to them, an effective solution may be achieved through deep spending cuts
to public welfare. These issues remain sensitive and no consensus has been reached
upon, as changes recommended by one party is disagreed upon by the other. The
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necessity to upkeep the economy and public welfare, while ensuring public approval
remains a challenge.
Though the situation continues to be intense, Congress has made some recent
developments in deciding on a budget plan. A bipartisan budget deal was approved in
January 2014 for $1.1 trillion, which would keep the government funded through
September 2014. The deal represents a sense of cooperation between the two parties that
was absent throughout 2013; a correlation between unfavorable public opinion and the
sudden Congressional desire for compromise is easily observable. The spending bill
mostly consisted of extensions of previous funding decisions, but the collaboration
between the two parties is commendable; Obamacare continued its funding in a
concession to the Democrats, and the IRS and Environmental Protection Agency
received spending cuts in a concession to Republicans.
The crisis may have been averted by a couple of months but Congress will have
to face drastic decisions in the near future. The US has been pushed to the edge of a
credit default, which not only led to domestic economic troubles but international
instability as well. The growing debt has been weighing on the minds of policymakers
and has been a driving factor in much of the disagreement over the economic path that
the country should take. Having risen to more than 70% of the GDP, the debt has and
will continue to be a highly contentious issue in US politics. The United States economy
is a cornerstone of the global economic system and any unnecessary volatility affects
countries across the globe.
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The US debt crisis has also had an increasing effect on the economies of nations
in Asia. China’s rapid growth over the past few decades allowed their government to
heavily invest in US treasury securities; it currently holds nearly eight percent of US
national debt. China’s ownership of such a significant portion of the US debt, along
with the fact that it has grown into a global economic powerhouse poses serious
concerns for US ‘s dominance in handling international issues and extending influence
over dealing with other countries’ national security.
Over the past several months, China
has openly displayed its willingness to
take physical action to create a
regional sphere of influence in Asia.
The conflict between China and Japan
over the Senkaku Islands in the South
China Sea has sparked tension with
both sides demonstrating their readiness to use coercive force. Additionally, China has
expanded its maritime boundary beyond the ‘nine-dash line’, which clearly impinges
on its neighbor’s territorial waters.
The growth of a regional power in Asia is a legitimate concern for the US
government, which was aptly demonstrated by the Obama administration’s military
pivot towards the region. In addition to the challenge presented by China, US has to
face a new threat in the form of a troubled budgetary situation. The desire to curtail
defense spending may be valid in the face of rising expenses, but it also comes with
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national security concerns. If the US wishes to maintain its influence in Asia and protect
the interests of its allies such as Japan and South Korea, it needs to look into solutions
that will control its debt but at the same time not affect its military capacity.
The incredible growth that China’s economy has seen over the last few years has
lent increasing credibility towards Chinese endeavors both at home and abroad. In
addition, the growth has given China the confidence to go toe to toe with the world’s
largest economy; it is providing relief money to developing nations with no strings
attached and Chinese state-owned corporations have been obtaining contracts for
infrastructure and natural resource development all across the globe. It has been able to
do so only because of its strong financial position, which can indirectly be attributed to
its investment in US debt. This fact, coupled with the regional dominance that China is
asserting, has showed that it is developing into not just the powerhouse of Asia but also
a global competitor with which the United States must compete.
Of course, the opportunity to avoid a zero-sum economic war still remains and is
contingent on the US government’s ability to curtail the national debt. Additionally, the
US must restore international confidence in its economic leadership and the process can
start with Congress overcoming partisan disputes over spending and taxation.
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Questions to consider:
1. What are some ways in which the national debt can be controlled?
2. What should the US government do to increase its revenues and/or decrease its
expenses?
3. Should the US be worried about China holding a large portion of its debt?
4. What should the government do to maintain its competitiveness in the global
economic marketplace?
5. How can the political parties overcome partisanship and prevent future government
shutdowns?
6. Is national debt the most important issue that needs to be addressed by the United
States today?
These questions are just a guide to aid you in your research. Please do not let the
questions pose any sort of restrictions on what you can address and research.
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Recommended Sources:
Here is a list of sources to further your research:
US Department of The Treasury:
http://www.treasury.gov/
Debt Limit:
http://www.treasury.gov/initiatives/pages/debtlimit.aspx/
US Debt Clock:
http://www.usdebtclock.org/
US National Debt in news:
http://www.brillig.com/debt_clock/
CNN Money – America’s Debt:
http://money.cnn.com/news/specials/debt-crisis/
Council on Foreign Relations:
http://www.cfr.org/financial-crises/dangerous-us-government-debt/p22408/
Foreign Holdings of US Debt:
http://www.washingtonpost.com/blogs/worldviews/wp/2013/10/10/thissurprising-chart-shows-which-countries-own-the-most-u-s-debt/
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