Question

3. During the past decade, the federal government’s debt increased at a faster rate than at any time since the end of World War II, outstripping economic growth over that period. At the end of 2019, federal debt was higher than at any other time since just after the war.

The U.S.’ Congressional Budget Office (”CBO”) has published its concerns of a growing national debt and the negative consequences for the economy and policymaking—they include:

a) Lower national savings and income

b) Higher interest payments, leading to large tax hikes and spending cuts

c) Decreased ability to respond to problems

d) Greater risk of a fiscal crisis

Summarize each of these. (They don;t have to be very long summaries)

Answer 1

Ans; Debt rising has negative consequences for the economy and the policymaking.

(A) Lower national savings and income

Large federal deficits can cause a decrase in investment and higher interest rates.With government borrowing more a higher savings will go to pay the national debt payments rather than for investment. It will subatantially decarse the amount invested in private activities like factories etc.which in further will reduce productivity of workers and will have a a negative impact on the wages Although deficit increase the demand for goods and services in the short run but that demand will not be sustained one;

(b) Interest payments leading to tax hikes and spending cuts

Asthe interset payments riseand the debt grows; federal interest payments will rise beacause they have to a high interest; this would decrease the amount available with the government and to finance their debt payments the government will raise taxes and will reduce its investment in the public ventures like infrastructure etc.high taxes will discourage the people from working and saving thus further reducing output and income.If larger deficit is continued without the rise in taxes then large deficit reduction will be neded in future.

(c) Decreased ability to respond to problems

With a large and growing federal debt, the government has less options available. For example during the financial Crisis of 2008, governnment increased its spending a lot due to which debt grew substantially. Due to high debt government will find it difficult to undertake another stimulus under similar situations like recession in future. As a result recessions will have a large negative impact on the economy and the reduced financial flexibilty will weaken the US position in international market.

(d) Greater risk of financial crisis

If debt continues to climb then some investors will loose confidence in the government's ability to pay back borrowed funds; Investors will demand higher interest rates on debt and increase in interst rates will reduce the market value of outstanding government bonds, causing losses for investors and instigating a new financial crisis due to losses of mutual funds, pension funds etc. and some financial institutions will be on the verge of fall.