Question

scenario:

1. Currently the U.S. national debt is over $23 Trillion. Many people feel the high level of the national debt is a very bad thing and it should be paid off.

d. State which approach you would use to get the money. Why did you select the approach that you selected and not the alternatives? e. Thoroughly and completely explain how your approach would work to eliminate the national debt, and explain the impact your solution would have on at least 5 key economic variables? i. Implement your approach and use the what-happens-next approach to capture the detail of how your solution might work.

Answer 1

It is correctly argued, that across the United States, the national debt which is the government borrowing is increasing by the day. As the Corona Virus Pandemic struck this further rose as the government had to spend more money into the health care sectors and with business establishments remaining shut, the tax revenues for the country were extremely low.

The United States already operates at one of the world’s lowest tax rates when compared to developing countries such as China and India. On the contrary, investments in the country are regarded to be considerably safer because of the fact that capital utilization and technology are two primary key advantages which the country has up and over other regions of the world.

Accordingly, a three-step approach can be taken to increase revenue for the government and ensure that it has sufficient money so as to be able to repay its debt.

1) Increasing Tax: -

The first approach to solving this problem is to increase the tax rate which the government is currently charging especially from the rich and elite sections as well as corporate bodies to enable itself to increase its revenue. Some may argue that this may limit growth in the United States as these sections of people may not be able to produce at same levels, or the income of people may decline for consumption and reduce overall tax collections. However, it is important to realize that most corporate houses have excess reserves running into millions of dollars and these are the core targets for the government.

When we increase taxes, the resultant is that inflation in the country gets corrected, as people have lesser money available in their hands, the availability of funds makes it possible for the government to allocate in areas such as economic expansion as well as it reduces the risk of default by the government as well.

All in all, we can summarize by saying, that to bring in additional revenue for a government like the United States which is considered to be one of the safest place for investments, Increasing Tax Rates can be a good way in which the government can increase its revenue from various sources, so as to be able to repay its debts.

2) Better International Policies: -

National debts are primarily required when the governments imports increase its exports and it needs to take debt to repay other parties which it imports from. It has long been argued that the country has been over favourable to other countries such as China which have taken undue advantage of the lower tariffs or taxes which it charges on imports from these countries on one hand, and on the other has been protectionist in its imports from America.

To see through this problem, it is recommended that the government of America take critical steps such as evaluating its trade regulations with countries such as China to make exports easier and imports difficult from these countries. This includes creation of retrospective or retaliate tariffs with countries so as to decrease its spending and focus on self-reliance for domestic demand. This will help in ensuring that further debt does not arise even when the government is focusing towards increasing local taxes as explained above.

This then would increase the overall production in the country which will increase to accommodate all domestic demand which earlier imports used to fulfil and better conditions for the country would prevail. We are not using an import-based strategy here, primarily because imports are an added expenditure which the government must eliminate.

3) Reduce Expenses: -

The next approach to be followed is for the government to review its overall expenditure on various resources which it is currently making and curtail the same if required. For example, each government spends a lot of money towards schemes such as subsidies, etc which can be shifted over to the forces of demand and supply and the government would reduce its overall expenditure thus increasing its paying capacity towards its debt obligations. A key example of this is the subsidy which the government provides towards purchasing solar vehicles. If it reduces the same, it would have additional revenue readily available to provide towards debt obligations.

Key Indicators and its Impact: -

As a result of the policy decisions, the following will be the net effect on 5 critical Economic Indicators: -

1) Aggregate Supply: -

As the country increases its taxes on imports, these would be discouraged as their relative prices when compared to imported goods would go up significantly. The end result would be that the aggregate or total supply of goods and services which are produced within the country would increase substantially.

2) Employment: -

As the companies increase their supply of goods and services, the employment opportunities available in the domestic markets would also increase. This is to accommodate for the increase in supply caused by a shift in the inward-looking strategy by the government.

3) Gross Domestic Product: -

The gross domestic product is the final value of the goods and services produced in a country. With a rise in supply as indicated above, the overall value of the final goods and services in the country would also increase leading to a rise in the gross domestic product as well.

4) Inflation Rate: -

As tax rates are increased by the government, the inflation rate would see a decrease. As people would not spend as much as they used to earlier. However this must not be seen as a negative effecting thing, as the United States already operates at one of the world’s lowest tax rates, which in comparison if increased a little may lead to significant increase in income for the government, however its impact on the general population would not be as much since the revision would be from a starting point which is already quite low.

5) Net Income and Lifestyle: -

As the employment opportunities in the country increase, the net income and the life style of most people within the country would also see a substantial increase due to the policies. Unemployment in the country would reduce due to increased domestic production, meaning more jobs and better wages for the existing staff, all of which would lead to better overall conditions in the society.

Please feel free to ask your doubts in the comments section.