Question

1. What are the LONG TERM HARMS imposed upon our economy and our society by our government’s policy of borrowing over $500 billion each year (in 2020 dollars) every year—well, almost every year -- since 1982? That is, what are the MANY, SEVERE HARMS CAUSED BY THE DEFICIT? Please discuss at least ten harms. 2. Please rank each of these many, severe harms from “MOST” harmful, in your opinion, to “LEAST” harmful, in your opinion, and defend your ranking system. 3. Which groups in our economy are “hurt the most” by this yearly deficit? Which groups are “hurt the least”? For example, let’s say that I am an old college professor living in a house that is paid for, free and clear. Compare me to a 20 year old college student just starting out in life. In theory, who is harmed more by this yearly deficit? Why?

Answer 1

1.) The government’s policy of borrowing over $500 billion each year i.e. since 1982 has put the economic health at stake both from fiscal and monetary perspectives.

Firstly, the government’s borrowing increases national debt and borrowing year-on-year will add up the debt and thus lenders will pressurize the government on its repayment which leads to a tough situation for the government to repay the debt and also maintain a stable budget.

Secondly, as the above effect of non-repayment at the prescribed time causes lenders to add up interest rates on the non-repaid amount which further increase the balance of payment deficit pushing the country into a proposing a deficit budget every year that limits the government’s capacity to propose massive welfare program.

Thirdly, in order to repay the borrowed amount the government will be forced to rise the tax rates both direct and indirect, which adversely affect the livelihood of low and middle income households. Furthermore, it also has an adverse and negative impact on small and medium scale industries.

Fourthly, as a subsequent effect of rising taxes the government will aim to reduce its expenditure which by cutting the subsidies and incentives massively.

Fifthly, because of rise in tax and cut in incentives people will be left with less money in their hands to meet their standard of living, which subsequently hampers the purchasing power of the people that leads to fall in demand.

Sixthly, The tendency of crowding out refers to lessening of private investments because of the increased interest rate which rises the cost of borrowing, which fails to motivate the private players to invest.

Seventhly, Decrease in net exports is caused because of lower level of production and moreover imports rise slightly so as to complement the required demand

Eighthly, As government keeps on borrowing it can’t keep the money idle, it has to spend for productive purposes which causes a mild inflation which is healthy, however, non-repayment of the borrowed amount and a very negligible balance being left with the government, the inflation rises further rapidly caused due to printing of more money.

Ninthly, Disinvestment of public sector undertakings, it means the government undertakings will be put on sale either partly or as whole because of the unavailability of funds in the government to take care of its operations, which leads to entry of various foreign firms into the domestic market.

Finally(Tenth), Domestic industries get affected at a large scale due to the entry of foreign firms which puts the security of domestic firms in the national market at stake.

2.) Hierarchical from MOST HARMFUL to LEAST HARMFUL

1. Increase in National debt

2. Rising interest rate due to non-repayment of the existing debt

3. Rise in taxes

4. Cut in subsidies and incentives

5. Fall in Aggregate demand

6. Crowding out

7. Decrease in Net Exports

8. Rise in inflation

9. Disinvestment

10. Damage to domestic industries

Reason: it is a chain of effects and the cause of the initial one of rising debts will add up the debts and interest will be charged on the rising outstanding amount and so as to repay the debt amount the government will have to gain money from some resources as it couldn't go fro external resources it wil source it internally from the people and organisations in the form increased taxes and cutting down subsidies and incentives to reduce expenditure which will reduce the amount of money left with the public to spend that leads to fall in the aggregate demand, as demand falls investment falls and the first one to withdraw investment is the private sector, which then leads to decrease in exports due to fall in production in the local market which forces governement to import so as to meet the existing negligible demand. The government further adiopts the policy of printing more currency to repay the debt which rises inflationary pressure and fall in the value of moeny in the international market. At the last stage it will disnivest the public sector holdings becasue of the unavailabilty of unfunds with the governemnt for continuing its operations, finally, everything from the above affects the domestic industries in the national market due to foreign competition but the positive effect is the domestic monopolies can be abolished and the competition brings in more efficiency in the production of goods and services.

3.) The group most affected is the low and middle income earners and the least affected are the rich and ultra rich of the society.

      With regard to the example, the most hurt by this yearly deficit will be the 20 year old college student as he will be just entering the work force he would possess various responsibilities and as a fresher he would earn only the amount required to meet his livelihood and thus it would be difficult for him to tackle through the problems arising due to the deficit, however the old college professor could save himself from the economic breakdown.