How Spending Hurts Rather Than Helps

If one asked Bill Gates to donate all his money to the United States Treasury to pay off some of its nearly eighteen trillion dollars of debt, only a little above .004% would be paid. Currently, reckless spending by the government and people has brought Gross Domestic Product (GDP) growth to a halt with the recent recession. While spending drives consumption up, therefore raising GDP, there is a limit to when spending turns for the worst. The housing market boom occurred as people bought $300,000 houses on minimum wage due to low mortgage rates with encouraging policy and poor banking practice. The debt leads to putting resources on paying off interest rather than investing and buying more things. As people and government spend without regard to interest, the two hurt the long run growth, create a future tax increase, and bring financial strain to the United States’ economy.

 

 

Total Federal Debt

Total Federal Debt, in terms of GDP%

Personal Saving Rate

All graphs are from FRED, of the Federal Reserve Bank of St. Louis

 

Ross Perot ran as an independent in 1992 Presidential Election, mainly on balancing the budget. He, a successful business, knows debt leads to more problems in the future. The St. Louis Federal Reserve’s data base, Federal Reserve Economic Data (FRED), provides accurate charts of the United States economic standing in several forms. One of those, the debt, has grown exponentially. According to CBS News in 2012, the United States “borrow[s] 43 cents of every dollar that it currently spends, four times the rate in 1980.” With that money, the national debt could much less, or more  likely the same, but with more spending on public goods rather than interest payments. Luckily for the United States, countries have invested so much into the United States, that an American default would hinder the foreign countries as they would lose those investments. Simultaneously, the United States possesses the best banking system in the world, and this leads to foreign investment. In the video by John Green, he explains what the debt means as well as additional information.

 

 

Green brings up the 90 percent debt to GDP ratio as an issue feared by several economist. A Ph.D. in economics, Burton Abrams writes about the Federal debt becoming the biggest threat to the health of the United States. The Terrible 10, which came out in 2013, brought up that “our public debt will be a drag on our future economic growth. Lower economic growth means slower absorption of new laborers into jobs and less success for those unemployed people seeking work” (Abrams 159-160). He, and several other economists, believe that government borrowing take money away from the private sector in order to pay off debt, which in turn hurts the ability of the private sector to hire and create new jobs. In Japan, the debt to GDP is well over 200 percent, and once again, the third largest economy in the world is back into recession after it tried to raise taxes to alleviate the colossal debt. The tax increase made people spend less; therefore, the consumption of the GDP went down drastically, even though economic growth was predicted.

Aside from governments remaining debtors, consumers also spend large sums on unaffordable items. Houses, like those mentioned in Green’s video,are collateralized, so the banks offered excellent deals, and people signed mortgages that turned out to be the “mort” of their life savings. Credit card debt remains around $15,000 based on the Federal Reserve’s estimate. With high levels of debt and higher interest rates in the upper-teens, people will eventually spend less on goods, but more on interest which hurts the nation’s growth and the people’s purchasing power.

 

 

Conrad Hackett, of the Pew Research Center, created an infographic that depicts the current debt. Unfortunately, the big numbers are not favorable, and those who fall with the infographic share a bit in common with Fountains of Wayne in its song, “Strapped For Cash.”

 

 

Works Cited

Burton, Abrams. The Terrible 10: A Century Economic Folly. Oakland: The Independent Institute, 2013Print. 20 Oct. 2014

Fountains of Wayne. “Strapped For Cash.” Traffic and Weather. 2007. MP3.

Schlesinger, Jill. “12 Scary Debt Facts for 2012.”cbsnews.com. CBS News, 17 Feb. 2012. Web. 27 Nov. 2014.

Understanding America’s Debt Problem. Perf. John Green. Vlogbrothers, 2011. YouTube. 28 Nov. 2014.

 

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