Essay/Term paper: Cutting the national debt

Essay, term paper, research paper:  Economics

Cutting the National Debt


"It's time to clean up this mess." Famous last words heard from the
mouths of many different politicians when talking about the national debt and
the budget deficit. Our debt is currently $4.41 trillion and we have a budget
deficit of around $300 billion and growing. Our government now estimates that
by the year 2002 the debt will be $6.507 Trillion. While our politicians talk of
balancing the budget , not one of them has proposed a feasible plan to start
paying down the debt.
In the early days of our government debt was considered to be a last
resort. In 1790, when Alexander Hamilton, as secretary of the Treasury, made
his first report on the national debt of the United States, he estimated it at
close to $70 million. After alternately rising and falling, the debt stood at
only $4 million, or 21 cents per capita, in 1840. That was the lowest point ever
reached by the public debt of the U.S. After 1840 it rose to a peak, in the last
year of the Civil War, of almost $2.68 billion and a per capita figure of $75.01.
The only justification for debt of any significant amount was a war. By 1900
this had been reduced to under $1 Billion. By 1919, the end of World War I, the
debt had climbed to $25.5 Billion. In each of the following years the debt was
reduced, and by 1930 stood at $18.1 Billion. With the collapse of Wall Street in
1929, the country
(debt history: 1850 to 1950) fell into the Great Depression, which lasted
until 1940. At that time the debt had climbed to $51 Billion. By the end of
World War II the debt was $269 Billion.
Again the government worked to reduce the debt, and by 1949 it was
$252.7 Billion. At that point the Korean War started, sending the debt to $274
Billion by 1955. Since then, there has been no serious effort to pay down the
debt. The main point to be made was that on three separate occasions a major
debt reduction effort had been made, but in the past 55 years in spite of much
arm-waving there have been no similar results.
The U.S. debt is divided into two major kinds of loans, marketable and
nonmarketable. The former provides about 52 percent of the total and is made up
of bills, notes, and bonds that can be traded; the latter includes U.S. savings
bonds, foreign-government-owned securities, and government account securities
that are redeemable but not tradable. Maturity of this debt ranges from less
than a year to over 20 years, with the average maturity about 3 years. More than
half of the debt, however, is short term, maturing in less than a year. A
ceiling is placed on U.S. federal debt, and Congress must enact new legislation
to raise the ceiling. Between 1981 and 1990 the ceiling was raised from about
$1.08 trillion to about $4.15 trillion.
Unfortunately at the end of 1995 we reached the ceiling again, and
Congress refused to raise it. They felt that it had become too much, and there
was a government shutdown for a few days in November. Not only was this an
inconvenience to many people, it also accounted for an estimated $63 million a
day in lost productivity, and almost double that in lost tax revenue.
Due to the threat of this, Clinton has a plan to balance the budget by
2005. This plan includes a projected $1.1 trillion spending cut over the next
ten years, slow the growth of spending on Medicare and Medicaid, trim social and
farm programs, close a number of corporate tax loopholes and retain the package
of middle-class tax cuts he proposed earlier. He also specified that programs
such as Social Security, education, and training would be immune from such cuts.
He did warn though, "Make no mistake-- in other areas, there will be big cuts,
and they will hurt. This was June of 1995, and at the end of Fiscal Year 1996,
the national debt growth was $80 billion higher than previous projections, with
a final debt increase of $331 billion.
Where does this money go? This happens to be the most popular question
asked, yet the one nobody has a definite answer to. Out of all of the places
the government spends money, more than 50% goes to three main areas: defense,
Social Security, and Medicare and Medicaid, all of which combined account for
between $750 and $900 billion per year. In the case of national defense, there
are a few different points to be made in justification of these outrageously
high numbers. First, the costs in the 1940s and 50s due to both World War II
and the Korean War. Next comes the costs of the War in Vietnam in the mid-1960s
and 1970s along with LBJ's Great Society Programs. This trend of big spending
continued on through the until the end of the 1980s under Reagan's Cold War
programs. With the Cold War over, and the United States recognized as the
world's only superpower, the defense budget is now being cut. But despite these
cuts, experts estimate that up through the year 2005, we will spend at least
$250 billion a year on national defense.
Social Security is yet a different story. Social Security has become
the linchpin of the Federal Government. Every politician in Washington knows
that Social Security will eventually fall, but very few will actually propose a
budget that cuts out Social Security completely. For those who do, any such
plan is shot down immediately. Since its conception in the 1950s, Social
Security has done nothing but grow, and this year will cost somewhere in the
neighborhood of $330 to $350 billion. If that's not enough, it is projected
that by 2005, the program will balloon to almost $450 billion. That's a 28%
increase in less than 10 years.
Medicare and Medicaid are also untouchables in the federal budget,
although in Clinton's new plan, he plans to cut the growth of both equally.
While exact numbers aren't available for Medicaid, Medicare is soaring at the
same rate as Social Security. Right now, Medicare costs about $160 billion. In
ten years, it will grow at an alarming rate up to over $270 billion. That is a
68% growth rate. If this trend continues, Medicare will reach $500 billion
within 25 years. That's a lot of money for health care.
As for the rest of the money, the bulk of it goes to programs such as
income security, health, education, and transportation among other projects.
About $220 billion goes towards interest we pay on the debt, and as our national
debt keeps rising so will this number. If the debt grows to the amount
predicted by Leon Panetta, Clinton's Chief of Staff, $6401 billion, or to the
size that some economists believe, in the excess of $7000 billion, this number
will soar higher and higher each year.
As the earlier graph pointed out, our national debt is not going to
decrease by itself. What this country needs is a compromise between Congress
and the President, no matter which President. Some experts feel that it is
necessary that we side with one party or the other (www.nationaldebt.com).
Currently we have a Republican Congress and a Democratic President. This isn't
going to help make the situation any easier. As a matter of fact, in recent
years the measure of annual deficit is determined inversely by the amount of
money that the government can loot from the Social Security Trust Fund and the
Federal Employees' Trust Funds plus 148 other trust funds. It has little or no
relationship to the fiscal management of the government's officials. The more
trust fund money they can plunder, the less the deficit will be, but the more
the debt will increase.
The best comparison that can be made to the national debt is an enigma.
If the government tries to decrease it, somebody is going to be mad over what
program is being cut. The more the government spends, the more people complain
that it is spending too much. There is no balance, and that is why it makes
elected officials so indecisive about their views on the debt, they want to get
re-elected. One final thought, balancing the budget will eliminate the deficit,
but it will not stop the growth of the debt, and the debt is what we pay
interest on, not the deficit. If there had been no deficit during the 1990's,
the debt would still have increased by $1 Trillion. Seem scary? Obviously we
need immediate action, with minimal bickering.

Works Consulted

Clinton Outlines Plan To Balance Budget By 2005; Melissa Healy; Los Angeles
Times; June 14 1995
"National Debt"; Encarta On-Line Encyclopedia 1996
Http://www.cnn.com Http://www.nationaldebt.com