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Discussion Question Response

In your responses, comment on at least two posts from your peers by comparing and contrasting your experiences and opinions. Share current news articles or references from the textbook that support your decisions in the simulation and your claims related to the national debt.

Richard Warren – Hello Everyone,

I completed this simulation and fixed the debt. However, I was dissatisfied with how I achieved the goal concerning some issues. I hated having to make some of the decisions, but tough times call for tough decisions. Nobody can have everything they desire; thus, compromise is required when it comes to policy or budgeting. I saved $208 billion by limiting highway investment to current revenues under the education, infrastructure, and research area. This decision did not stop spending in this area, but it did limit it to what could be afforded. I also elected to devolve K-12 education to the states in this area, which saved another $440 billion. I do not believe the federal government should be involved in our children’s education. Local and state legislators should be in charge of this. In this part, the decision was made to replace present student loan subsidies with income-based repayments. This resulted in a budget reduction of $110 billion.

The next topic up for discussion was defense. I am one of those Americans who believes that a robust defense is essential. There will be no freedom or country without the ability to defend it. There have been countries in the past that attempted to conquer the globe and would welcome the opportunity to do it again. We can go back in time as far as we want to find these countries. However, I do not want to see our country go crazy regarding defense spending and go bankrupt. Common sense is required. I decided to put an end to the conflicts in Iraq and Afghanistan. This was a simple decision since I am confident that we are no longer at war with either country. At present, at least, not in a shooting conflict. Another $600 billion was saved for our country as a result of this.

Following that, I decided to save $60 billion by delaying the development of new weapons. Please understand that I did not halt development; instead, we slowed things down. In combat, there are only so many ways to kill someone. The following issue was a challenge for me. I decided to reduce Navy shipbuilding. We were able to save $60 billion as a result of our efforts. Finally, I defend this decision by stating that we are only slowing construction, not stopping it. However, I’ve heard that China can beat us at sea, so we’ll need more ships eventually. The next item I chose to cut was straightforward. By lowering foreign aid and international program spending, we were able to save $130 billion. It is not our obligation to police or care for the rest of the world until American cities are free of violence and our children are fed. We can discuss persons who live in other countries at that time.

The part on Social Security was the next to be tackled. Although I recognized that adjustments were necessary, I made every effort to make them in the best interests of our seniors. I am one of these elders, but I ignored it and made no changes for my own advantage. I increased the standard retirement age to 69 years old. This decision resulted in a $110 billion saved. Several things influenced my decision to make this move. This is for people who have reached standard retirement age. Even if a senior has a disability, they can continue to get benefits. The majority of healthy adults continue to work past their existing retirement years, and many hospitals and other institutions allow seniors to volunteer, showing their desire to remain active. The next thing was one that I didn’t fully comprehend. By slowing the initial benefit growth, I was able to save $160 billion. It didn’t seem horrible, and it would save a lot of money. When I considered this choice, I thought how many politicians support or oppose causes that they don’t fully comprehend because the word sounds good or bad?

The following four items appeared to be reasonable options, and they decreased the budget by $980 billion. Whatever way you look at it, that’s a trillion bucks. These included using the chained CPI to calculate inflation, increasing the payroll tax by 1%, means-testing benefits for high-earning seniors, and lowering the cost of the disability insurance program.

The Health Care segment came next. I am not a fan of most of Obamacare. However, there are a few things that I enjoy and would not want to see disappear. To put it another way, I’d like to have my cake and eat it too. The first issue was to change the law on healthcare reform (Obamacare). I didn’t want to spend $3.73 trillion to enlarge it! That alone would wreak havoc on my budget. I didn’t want to spend another half-trillion dollars on Obamacare subsidies, either. I also did not want to replace Obamacare with state grants that could have resulted in a $460 billion savings. Even if I wanted to save money, I couldn’t substitute Obamacare. As a result, my administration opted to address the issue at a later time. The following six topics on the table were simple for me to decide on, and they saved the country $1.4 trillion in debt. Because of the impact vs. the expense, these adjustments were justified. These six were: Increase Medicare premiums for high-income beneficiaries, reform Medicare drug benefits, reform Medicare drug spending with negotiations, enact medicare malpractice reform, reform Medicare provider payments, and allow private plans to compete with Medicare.

The following section dealt with domestic spending. I decided to restore non-defense spending to 2017 levels, which resulted in a $780 billion savings. To save $50 billion, I decided to remove the community development and community service block grants. Local and state administrations, in my opinion, should take the initiative and build their own cities. Too often, mayors and governors are fiscally irresponsible and expect taxpayers in other states to pick up the tab. There’s a reason why states are divided and operate separately. States should take care of themselves and their citizens or abolish statehood altogether and become one large country with only cities. The removal of 19 independent agencies and commissions was also on the table for a $40 billion savings. We could definitely save even more money if we cut another 100 of these ineffective agencies. We also saved another $50 billion by cutting spending on the environment. We simply slowed it down, not completely halted it. This next item offered us the opportunity to require States to cover one-quarter of the cost of food stamps. I agreed with this and saved $180 billion. I then reduced the cost of the Federal workforce, which reduced the debt by $160 billion. The next item sounded good. I chose to consolidate and block grant child nutrition spending. We should support taking care of our children.

The next section was dealing with individual income tax. Out of the 14 items to consider, I looked at and changed 4. There was a fortune to be had in this area for our government at the expense of inflicting more tax burdens on our people. The four changes made resulted in a savings of $1.76 trillion. These were: tax capital gains and dividends as ordinary income for high earners, tax income above 10 million at 50%, eliminate preferential rates for carried interest, and institute a cap on the health insurance tax exclusion.

The final section was the other taxes. I would not be a tax-happy member of Congress or President. Of the 18 items to be considered, I only looked at one. This was to increase cigarette and alcohol taxes. In doing so, we cut an additional $180 billion.

My strategy was to slash spending where it would have the least impact on citizens. There would be a few cuts, but nothing too serious. I tried to look at matters objectively and do what was best for all parties involved, regardless of political affiliation.

I feel that a large national debt will be an issue for future generations. True, we have the ability to print unlimited amounts of money. It’s also true that newly created money is worth less than the previous day’s money. The resources used to make a $1 bill will eventually be worth more than the dollar itself.

If the debt were to continue, Americans would have fewer economic opportunities. Also, excessive debt levels will affect many other areas of the economy in the future. Higher interest rates, for example, as a result of increased federal borrowing, would make it harder for people to purchase a home, finance a vehicle, or pay for education. Interest rates on government borrowing could also climb if investors lose faith in the country’s financial strength.

Concerning the “ideal debt-to GDP ratio,” the debt-to-GDP ratio measures a country’s public debt in relation to its gross domestic product (GDP). The debt-to-GDP ratio accurately reflects a country’s ability to repay its debts by comparing what it owes to what it generates. This ratio, which is often stated as a percentage, can also be understood as the number of years required to settle the debt if GDP were totally allocated to debt repayment. According to studies, when a country’s debt-to-GDP ratio exceeds 77 percent for a sustained period of time, economic growth slows. The debt-to-GDP ratio is a measure of a country’s ability to repay its debts. It is commonly stated as a percentage. If the ratio suggests that a country cannot pay its government debts, there is a possibility of default, which might cause market chaos (World Population Review, 2021).

The crowding-out effect claims that more government spending reduces private spending. The crowding-out effect occurs for three main reasons: economics, social welfare, and infrastructure. On the other hand, crowding-in shows that government borrowing can boost demand. Increased borrowing by large governments is the most prevalent kind of crowding out, as it raises interest rates (Kenton, 2021). According to the multiplier effect, when the government buys $20 billion worth of planes from Boeing, the subsequent increase in aggregate demand must be greater than $20 billion. Another impact is the reversal of the previous one.

While an increase in government purchases boosts overall demand for goods and services, it also raises interest rates, which reduces investment spending and puts downward pressure on overall demand. The crowding-out effect refers to the decrease in aggregate demand that occurs when a fiscal expansion raises interest rates. As the interest rate rises, the quantity of products and services requested decreases. Because borrowing is becoming more expensive, demand for household and business investment goods is dwindling. To put it another way, as government purchases rise, so does demand for products and services, which may drown out investment (Mankiw 2021).

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Lindsay MacTavish – Share your experience in the simulation. What strategies did you pursue? Were you successful in reducing the debt?

During the simulation, my goal was to reduce the overall US debt. I was successful with this, however, the decisions felt like a double-edge sword. For example, I implemented a wealth tax which greatly reduced overall debt. However, what will this look like in the long run? Will wealthy citizens relocate out of the country or commit tax evasion? At the same time, a wealth tax could allow for more resources for businesses across the board.

In your opinion, is a high national debt a problem for future economic growth? What is the ideal debt-to-GDP ratio? Research academic sources or refer to the information available through the simulation to support your opinion.

A high national debt may pose a problem for future economic growth. This is because there is less spendable tax revenue for other government assistances. Overtime, interest rates can raise which will increase the cost of borrowing. Goods and services can increase causing higher inflation rates. Though there is not a standard ideal debt-to-GDP ratio. “In a study conducted by the World Bank, a ration that exceeds 77% for an extended period of time may result in an adverse impact on economic growth,” (Debt-to-gdp ratio, 2021).

Government spending increases national debt and can cause a crowding-out effect. Explain what the crowding-out effect is and why it’s considered a negative effect of increased government spending. Use information from the textbook to support your analysis.

The crowding-out effect is when there is a reduction in aggregate demand due to a fiscal expansion raising the interest rate. An increase in government purchasing will increase the aggregate demand for goods and services. This is because income levels will rise, and workers and firms will increase consumption. However, there will be an increase in interest rates which will minimize investing as it has become more expensive. This will then decline the demand for goods and services, dropping the AD curve (Mankiw, 2021).

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