National Debt Part 2

In part two of the national debt topic, I want to examine what the possible leaders of the United States say they will do about the deficit. The previous blog showed just how big of a problem the national debt is and why this matters for average Americans. While both candidates say they want to reduce the deficit, which plan is more likely to really reduce the country’s yearly deficit and get the nation closer to a balanced budget?

First and foremost it is important to make a distinction between deficit and debt. They are connected terms but mean very different things. The national debt is the total amount of money the country owes outstanding at any point in time. The national deficit on the other hand, is the increase to this national debt every year due to the budget of the federal government. Since 1970 the US government has run a deficit all but four years. This means that all those years, except for four, the government spent more than it took in through taxes. This “deficit” between the two is the amount of additional debt added to the national debt. The first step to reducing the national debt is getting the deficit under control. According to the bipartisan committee called Simpson-Bowles that was created to examine the debt problem, our nation needs about a $4 trillion reduction the national deficit to get us on the right track to tackling the national debt. Both candidates claim that they have a plan that will deliver this magic number, but with further examination it remains doubtful that either future President will be as successful as he claims.

In his “5 point plan” Republican Nominee Mitt Romney lists “Cut the Deficit” as one of the most important points in his proposed plan for the country. Under this point he lists several suggestions as to how he would accomplish this as President. These are: reducing non-security discretionary spending by 5%, capping federal spending below 20% of the economy, giving states the responsibility for programs that they can implement more effectively, and consolidating agencies and aligning compensation of federal workers with private sectors as the ways he would do this. A major problem with this proposal is the lack of details. While Romney’s campaign has consistently claimed that cutting federal programs is a key part of his plan, it has just as consistently not been able to identify a single program that it would cut. This lack of detail makes it unclear what exactly Romney would cut in office, besides non-military discretionary spending, which is already at an all-time low in terms of a percentage of GDP. Keeping this in mind, it is further unrealistic to claim that the deficit will be maintained at less than 20% of GDP. Even if Romney’s economic policies accelerated GDP growth to triple what it was the past two quarters (around 2%, a jump to 8%), the increase in debt from his proposed tax cuts would more likely increase the debt to GDP ratio. Giving states the responsibility to some programs to run more effectively is an innovative idea that could reduce costs, but again the Romney campaign has failed to deliver real examples. While the claims Mr. Romney make sound like they would significantly reduce the deficit, the lack of realistic economic projections and the lack of details in his proposal make it hard to believe.

The President claims he can reach this $4 trillion in deficit reduction mainly through budget cuts and winding down the war in Afghanistan. In addition to these cuts Obama wants to increase the tax rate for the wealthiest in the country. Already the President has made some headway towards these goals. Last summer the President signed a bipartisan act into law that included over a $1 trillion in spending cuts. Another key component of his plan is winding down the war in Afghanistan. The President claims the savings from not funding a war in the Middle East would allow him to further reduce the deficit. He has also proposed a fairly detailed plan of an additional $2.2 trillion of budget cuts for the future if he were to be re-elected. Some argue that the budget reductions and war spending should not be included because they already happened or are already expected to happen. First, the idea that the policies already put in place should not count is unfair. If a President has a large plan and splits that plan up to get it passed in Congress, the first part of that plan that is passed and implemented would still “count” as part of the overall plan. Secondly, if the reduction of war spending should not count then the projected spending should also not be used in the Congressional Budget office’s projections of the budget deficit. This spending, however, was included in those projections so it is fair in my opinion for the President’s administration to “count” them in his projected deficit reduction.

The real problem with the President’s plan is getting his ideas passed through Congress. While raising taxes on the wealthy and further cutting the budget look like a good plan to reduce the deficit, it is going to be hard for the President to get these ideas passed through Congress. For example, rich men in power typically do not like raising their own taxes. Overall however it seems that at this point the President has more of a proven and specific plan for how he would address the deficit. Romney needs to come forward with a more specific plan of action if he is going to convince Americans he can address the deficit problems of this country.

Stephen Padgett

Stephen Padgett

Stephen Padgett is a current junior at the University of North Carolina at Chapel Hill. He is working toward a BA in Economics and Political Science and plans on graduating early in December of 2012. Although he does not know what he wants to do for his career, he is looking forward to an opportunity with Credit Suisse’s Operations Team this summer in Raleigh.

Financially Stephen grew up in a family that preached saving and living below your means. That, in part, translated to his interest in Economics, especially how economics can affect individuals’ financial lives. Through his financial markets class in the fall of 2011, he furthered this interest by analyzing macroeconomic events. Stephen believes that finance, personal finance in particular, is a subject severely left out when it comes to public schooling in this country, and it is a problem that has manifested itself and contributed to many of the problems seen today. He also believes that education is the key to improvement and hopes that through his writings he will be able help people learn about finance, macroeconomics, and how to be financially savvy for the future.

In his free time Stephen enjoys playing and watching sports, wakeboarding, sailing, and country music. At UNC he has participated in Strive for College, UNC Dance Marathon, and UNC Relay for Life.
Stephen Padgett

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