Question

Explain the pros and cons of federal debt. What specific considerations suggest that federal debt should be reduced? What specific considerations suggest that increasing the federal debt is acceptable? From a Christian worldview, what action should government take with respect to the federal debt? Be specific.

Answer 1

Pros: Federal debt is a good way for the nation to secure additional funds that can be used for investing in economic growth. Secondly federal debts have a higher degree of safety (for investors and lenders) than foreign direct investment.

Cons: When federal debt level crosses the critical level then risk of default rise, leading to increase in interest rates. It also leads to lower credit ratings for the nation. Increasing debt may eventually lead to a debt crisis in the future and different components if economy (like housing, auto loans etc) will become more expensive.

Specific considerations that suggest that federal debt should be reduced are when debt to GDP ratio crosses the critical level and this leads to rising trend in interest rates.

Specific considerations that suggest that increasing the federal debt is acceptable are when standard of living increases with increase in the federal debt levels and level of capital spending increases and government builds new roads and bridges, spends on education, job creation etc.

From a Christian worldview government should aim at using federal debt in a prudent and rational manner and ensure that the debt level does not become a burden on the economy. This is deducted as per Proverbs 13:22 (which states that inheritance should be left for future generations) and Nehemiah 5:3-5 (which states that debt can make you powerless).