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Resolved: That eliminating United States government budget deficits should be prioritized over increasing domestic spending

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Background and Context of Debate:

A heated question in the country: Bloomberg.com. "Democrats Rubin, Schwartz Clash on Spending Versus Deficit Cuts" June 11, 2007 -- "Business executive and Democratic donor Bernard Schwartz is taking on former Clinton administration Treasury Secretary Robert Rubin in a battle over whether the [Democratic] party's top budget priority should be to cut the deficit or spend more."

The above dispute is instructive of the prominence of this debate within Democratic circles. The reason for this is that Democrats are much more inclined to value government spending under normal conditions. Conservative Republicans, conversely, are less inclined to prioritize government spending and government involvement, making them very unlikely to support the opposition case in this debate. While Democrats do value domestic spending, what makes this into a heated debate within the Democratic party is the challenges that are claimed to exist with the country's budget deficits.

Many Republicans, and perhaps some Democrats, would claim that this debate is misguided. Many do not consider the budget deficit to be a major economic problem nor that increasing domestic spending is a priority. This would lead to the conclusion that neither the pro or con cases are priorities, making the debate a low priority. Other positions could maintain that fighting the budget deficit and cutting domestic spending (instead of increasing it) would be the proper course. As mentioned above, these considerations are more closely aligned with Republican priorities, making this debate largely about the future of the Democratic party. Nevertheless, such labels are only of academic and political interest, and do not affect the underlying rationales presented below.


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Deficits: Is the US budget deficit a serious problem and priority?

Pro

  • US budget deficits are the cause of the falling value of the dollar, a major problem: - Dr. Paul Samuelson in 2005, Nobel Prize winner in Economics - "USA's balance of payments deficit is so strong and irreversible, that we must accept that at some future date there will be a run against the dollar. Probably, the kind of disorderly run that precipitates a global financial crisis."[1]
  • Budget deficits are only appropriate in times of recession or national crisis: Yet, it is a stretch to call the current circumstances in the United States to be a recession and/or crisis. Economists from the Austrian School point out that the United States experienced depreciation of 43% of Consumer price index (from CPI of 51 to 29) from 1800-1912: a period of strong economic growth in U.S. history.<ref>http://www.lib.umich.edu/govdocs/historiccpi.html</ref> Furthermore, those who would argue that an expansion of the money supply is necessary to expand the economy need to explain the colossal failure of Japan's Central Bank to do just that. In an attempt to follow Keynesian economics and spend itself out of a recession, Japan's central bank engaged in no fewer than 10 stimulus programs over the 1990s that totalled over 100 trillion yen. This did nothing to cure Japan's recession and has instead left the nation with a national debt that is 158% of GDP.
In the absence of debt monetization, when the Government borrows money from the savings of others, it consumes the amount of savings there are to lend. If the government were to borrow less, that money would be freed to work in the private sector and would lower interest rates overall. Lastly, raising interest rates is one of the traditional ways that the U.S. Federal Reserve uses to combat inflation (which can be brought on by government debt), but a large national debt figure makes it difficult to do so because it raises the interest paid in servicing that debt.
  • The 2006 U.S. Budget gives the long-term projection that the federal debt held by the public will reach 249 percent of GDP in 2075. This is more than double the maximum reached during World War II and nearly four times its current level. Most of this increase is due to projected increases in entitlement spending and the resulting interest on the debt.[2] Despite the fact that this is a projection that is based on an unaffected continuation of current "normal" economic conditions and laws and expenditures, that the figure is so dramatic would indicate that a substantial financial crisis could be looming. As many suggest, this may necessitate substantially re-writing US government social contracts with the American public.
  • National debt because it makes monetary policy less flexible. Higher inflation limits the ability of the government to fight inflation with higher interest rates; raising interest rates makes paying-off national debt much more expensive. Debt and a deficit often results in inflation because the government may monetize the debt by increasing money supply (a system of Fractional Reserve Banking). The theoretical causal link between the money supply and the inflation is described by the quantity theory of money; a theory advocated by Nobel prize winning macroeconomist Milton Friedman. This puts pressure on interest rate hikes to fight inflation (in addition to the above link between high debt and high interest rates). The problem is that with a large national debt, increasing interest rates makes it more expensive for the government to repay its debt. The larger the debt, the more likely inflation, the more likely interest rate hikes, the more likely that more national debt becomes more expensive to pay-off in the long-run.[3]
  • Higher US default risk leads to higher interest rates for T-notes: If the deficit and debt grow, the risk of the United States governmnet being unable to pay its creditors grows (however remote this risk might be). This decreases the demand for T-notes, and makes it necessary for the US government to offer higher interest rates to entice more creditors. [4]
  • National deficits are bad when an economy is fully employed The greatest benefits of increased capital inflows from borrowing come in increasing employment (the greatest source of increased productivity). But, when an economy is nearly fully employed, greater capital inflows cannot lead to much higher employment. Therefore, because the United States was nearly fully employed in and around 2007, the benefits are relatively limited.
  • Paying down the debt could cause a deflationary recession: Since the money supply is reduced when the U.S. Government pays down its debt, the unintended result of a government surplus could be a deflationary recession as the money supply contracts in the reverse of the process of monetization described above.

Con

  • US debt growth is not bad when properly compared to US GDP growth. The debt of United States, roughly 65% of its annual GDP, ranks the 35th highest in the world. France is 30th with debt equivalent to roughly 66% of its GDP. Germany ranks 29th with debt equivalent to roughly 66% of its GDP. Canada ranks 25th with roughly debt equivalent to roughly 70% of its GDP. Japan ranks fourth, with debt equivalent to roughly 158% of its GDP. Other industrialized nations ranking above the United States (with higher debt/GDP ratios) include Austria, Belgium, Israel, Singapore, Greece, and Italy. Other industrialized countries with Debt/GDP ratios in the 60% and 50% range include Portugal, the Netherlands, and Switzerland. Brazil and India also fall into this range. This all indicates that the US Debt is not that extraordinary or necessarily worrisome when comparing its Debt/GDP ratio to other industrialized countries.[5]
  • Deficit spending leads to economic stimulation. Following John Maynard Keynes, many economists recommend deficit spending in order to moderate or end a recession, especially a severe one. When the economy has high unemployment, an increase in government purchases creates a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. (This is the multiplier effect). This raises the real gross domestic product (GDP) and the employment of labor, all else constant lowering the unemployment rate. (The connection between demand for GDP and unemployment is called Okun's Law.) Cutting personal taxes and/or raising transfer payments can have similar expansionary effects, though most economists would say that such policies have weaker effects on , which method has a better stimulative economic effect is a matter of debate. The increased size of the market, due to government deficits, can further stimulate the economy by raising business profitability and spurring optimism, which encourages private fixed investment in factories, machines, and the like to rise. This accelerator effect stimulates demand further and encourages rising employment.
    • Since the money supply is reduced when the U.S. Government pays down its debt, the unintended result of a government surplus could be a deflationary recession as the money supply contracts in the reverse of the process of monetization described above. The government can avoid this unfortunate consequence by instead focusing on expanding its GDP and thereby "reducing" the percentage of GDP that debt represents. The hope is that the deficit spending that increases the debt will increase GDP by a greater amount, and thus — in relative terms, at least — the debt would decrease. This worked to great effect in the U.S. between the end of World War II and 1980, even though the debt showed a net increase in absolute value over the same period.

Foreign-owed debt: Are there major consequences to the foreign-ownership of debt?

Yes

  • US debt to foreign governments is problematic. While some have defended budget deficits on the basis that "we owe the debt to ourselves", this is increasingly not true, as the US debt is increasingly in the hands of foreign governments. In 2007, external debt (to foreigners) amounted to roughly 25% of the total[6], virtually double the 1988 figure of 13%.[7] Indeed, we don't owe this debt to ourselves. This creates a number of difficulties...
    • Foreign policy vulnerabilities to China: - In recent years, the debt has soared and inflation has stayed low in part because China has been willing to accumulate reserves denominated in U.S. Dollars. Currently, China holds over $1 trillion in dollar denominated assets (of which $330 billion are U.S. Treasury notes). In comparison, $1.4 trillion represents M1 or the "tight money supply" of U.S. Dollars which suggests that the value of the U.S. Dollar could change dramatically should China ever choose to divest itself of a large portion of those reserves.

No

  • China and other foreign-owners of US debt have little interest in making sharp moves out of the dollar:

Demographic problems - Do demographic trends in the US increase the need for cutting deficits?

Yes

No

  • The problem wasn’t huge when the Baby Boomers were zero to 20, so why when they’re 70 to 90?" - Noam Chomsky, The Social Security Non-Crisis (2005) - "What happened to the Baby Boomers when they were zero to 20? Weren’t working people taking care of them? And it was a much poorer society then. In the 1960s the demographics caused a problem but hardly a crisis. The bulge was met by a big increase in expenditures in schools and other facilities for children."
  • Chomsky (2005) - "The relevant number is what’s called the dependency ratio of working people to population. That ratio reached its lowest point in 1965. It won’t reach that point again until 2080, according to Social Security Administration figures."
  • "Any fiscal problem that might arise in caring for the elderly "boomers" has already been paid for, by the payroll tax rise of 1983, designed for this purpose." - Chomsky (2005).
  • "By the time the last "boomer" has died, the society will be far richer, with each worker producing far greater wealth." - Chomsky (2005).

War time cuts: Is it feasible to cut funding in war time?

Yes

  • A lot of wasteful spending can be cut easily: There is a lot of frivolous spending in the United States that can be cut out of the budget. It should be a priority to cut such frivolous spending.
  • Ending the war in Iraq would be an easy way to reduce costs:

No

  • Cutting costs in war-time is not easy or advisable.

Domestic spending: Is there enough domestic spending already or is more funding sorely needed?

Yes

  • The government should not be spending heavily domestically. This argument is sometimes based on conservative philosophies that call for a small role for government in general.
  • There are few serious domestic spending needs that aren't already being met.
  • Health care needs greater efficiency, not greater funding.
  • It would be more appropriate to spend at a later time.

No

Write Subquestion here...

Yes

  • Allen Greenspan views the US budget deficit as a major problem[8]
  • Robert Rubin, former secretary of the treasury under Clinton.[9]
  • David Walker, Comptroller General of the United States (the nations top auditor) - "We face a demographic tsunami" that "will never recede".
  • Douglas Holtz-Eakin says he's "terrified" about the budget deficit in coming decades.[10]
  • Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, "sees a future of unfunded promises, trade imbalances, too few workers and too many retirees. She envisions a stock market dive, lost assets and a lower standard of living." USA Today article
  • Alice Rivlin (who became the first director of the Congressional Budget Office in 1974) and Isabel Sawhill of the centrist Brookings Institution wrote the book Restoring Fiscal Sanity. Rivlin says it will take an "economic scare" such as the 1987 stock market crash to spur action. Sawhill likens the growing gulf between what the government spends and takes in to a "Category 6 fiscal hurricane."[11]
  • Progressive Policy Institute President Will Marshall said: "The conjuncture of growing deficits and debt and the baby boom retirement makes for a perfect fiscal storm."[12]
  • Ron Paul

No

See also

External links and resources

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