On Debt, Jobs, and Investment

By Ryan Walsh

​As any student of economics knows, a nation’s Gross Domestic Product is directly affected by the consumption and investment expenditures of its citizens. Given our present GDP of $14.6T, our national debt of $14.9T, and our federal budget deficit of $1.3T, the prospect of decreasing the US national debt is indeed daunting .
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There are two means by which our government can accrue enough money to pay off our national debt: (i) it can cut its discretionary spending and use the money it saves as payment; or (ii) it can increase taxes and use the revenues towards payment. When the national debt exceeds the GDP by $0.3T as it does now, if the government absolutely must intervene in the economy, it must tread lightly to avoid causing a recession.

Because consumption and investment are directly affected not only by the amount of disposable income a business or citizen has, but also by consumer expectations of the economy, the future of the United States economy is, indeed, in trouble. The American people know that the debt must be paid off in some way or another, and unfortunately, many expect that the government will choose to increase future tax rates rather than cutting its own discretionary spending.

Given that prices of consumer goods have increased by nearly 68 percent since 1967, consumers already find it difficult to purchase food and other goods due to this drop in disposable income. Moreover, resource costs for businesses are very high due to the falling value of the dollar in currency markets, and because of union power and wage floors, the costs of employment are also very high. Because of our high inflation rate, consumers have been less inclined and less able to purchase large quantities of goods and services, and because of high production costs, producers have had to either supply less at higher prices or lay off workers in order to maintain price and supply levels.

And there’s the rub—— when our national debt exceeds our GDP and our government wishes to– or rather feels that it must— intervene, corporate and personal income tax rates will inevitably increase, consumer and investor confidence and propensities to spend will decrease, and the GDP will decrease, giving us little hope of closing the gap between the amount of money we owe and the amount of money we earn each year.

The best course of action would undoubtedly be to increase aggregate demand and aggregate supply by increasing households’ disposable income and lowering businesses’ costs of production. However, little can be done unless the federal government actually decides to slash its spending on superfluous special-interest programs. If the government were to decrease its spending, it would have a budget surplus which it could employ towards the reduction of our debt. Further, consumers and businesses would be more willing and able to spend more on goods and resources given a reduced anticipation of an increase in their taxes. If the GDP were to increase and the unemployment rate were to decrease as a result of such policies, the United States might find itself better able to pay off its debt.