Introduction – A Definition of the Problem
Since 1789, the United States Department of the Treasury has experienced several challenges (as a manager of government revenue) (Irving 1). Notably, for many decades, the rising national debt has been a perennial problem faced by the department.
Successive governments have accrued many debts, thereby making it untenable for the department to continue borrowing more money because of the existing debt limits. This has created a serious financial problem for the American economy because the rising debt levels have become “too big” to manage (Irving 1). Although the country faced several debt crises (in 1995, 2011, and 2013), the U.S. Treasury has not proposed long-term strategies to lower the nation’s debt levels.
Consequently, they have escalated and reached unprecedented levels. This paper analyzes the debt crisis as a modern challenge of the U.S. Treasury because the government has tasked the department to enable economic growth and stability in the country. Notably, it explores the history, status, and potential solutions to the problem.
A History of the Problem
Sound national debt management is important for any developed economy. The 1917 Second Liberty Bond Act was the first legislation, made by the United States government, to limit national borrowing (Howell and Brent 175). Before its formulation, the government did not have a debt limit. Since the revolutionary war, almost every U.S. president has increased the national debt and its limit (since 1962, the American government has increased the national debt limit more than 70 times) (Masters 4).
This has happened for many reasons, including financing expensive wars, financing economic expansion programs, political pressure, and corporate bailouts (notably, under the Obama administration). Although the national government has faced several debt crises in the past, the U.S. Treasury faced the most recent crisis in May 2013 when it reached its debt limit.
Consequently, it faced significant challenges in meeting its debt obligations. Although the government has often raised the borrowing limit, on time, to avert a crisis, its debt obligations have continued to rise and are now at unprecedented levels (as of May 2013, the national debt was $16.699 trillion) (Masters 4).
The Status of the Problem
As shown above, the U.S. national debt is at unprecedented levels. The government’s failure to lower it exposes different aspects of the economy to financial instability and ruin. For example, exceeding the national debt limit could cripple the government’s ability to finance important national services, such as defense, public education, and health care services (such as Medicare) (Maugham 35).
Relative to this observation, Masters (5) says that if the government does not increase the debt limit, it would have to increase the tax rate to meet its financial obligations. Alternatively, the federal government would have to default on its financial commitments.
Besides reducing federal spending, the debt crisis could affect other aspects of the economy, including the financial markets (Maugham 35). For example, after the 2011 debt crisis, the stock market suffered significant financial losses because of the uncertainty caused by the crisis in the country’s financial market (Maugham 35).
Relative to this observation, Masters (5) says these uncertainties caused the Dow Jones to plunge by more than 2000 points. Similarly, on August 2011, observers said the Dow Jones recorded the worst single drop in history (it decreased by 635 points in 24 hours) (Masters 5).
Similar to the bad fortunes of the financial market, Maugham (35) says if the U.S. government defaults on its debt obligations, all economic recovery efforts that the country has made since 2009 would be undermined. Consequently, America could plunge back into a recession. Its impact on the financial market would also lead to the same outcome because there would be many uncertainties in the bond market (Masters 5).
This situation would later lead to increased interest rates, which would make it harder for people to borrow money from banks and other financial institutions. Overall, the debt crisis would shift the government’s focus from investing in important development projects, such as infrastructure and education, to paying for the huge costs of borrowing. Besides re-prioritizing the government’s commitment to developing the nation, the debt crisis also downgrades the country’s credit rating.
For example, after the 2011 debt crisis, Standard and Poor (S&P) downgraded the country’s credit rating (Gosling and Eisner 98). Observers fear that the continued challenges of the U.S. Treasury in meeting the country’s debt obligations could cause further downgrades from other rating agencies as well (Masters 5; Gosling and Eisner 98).
For example, Fitch Ratings says “Failure to raise the federal debt limit on time (several days before the Treasury will have exhausted extraordinary measures and cash reserves) will prompt a formal review of the U.S. sovereign ratings and likely lead to a downgrade” (Masters 5). Relative to this outcome, an independent study by the government accountability office showed that the U.S. debt crisis could cost Americans up to $1.3 billion, yearly, if the government does not take decisive actions to manage it (Masters 5).
Overall, the failure by the U.S. Treasury to manage the debt crisis could drag economic growth and shut down federal service delivery. Again, if the government fails to provide a short-term measure to correct such a perennial problem, the economy could stagnate.
Potential Solutions to the Problem
Historically, the U.S. government has always raised the national debt limit to avert a debt crisis. For example, successive governments have auctioned new debts to bridge their national budget deficits (Irving 1). Particularly, Congress has played an instrumental role in enabling the U.S. Treasury to auction the new debts because the department cannot do so without its approval to increase the statutory borrowing level (Irving 1). The government has used this strategy as a common solution for recurrent debt crises.
For example, it solved the 2011 debt crisis by increasing the U.S. Treasury’s borrowing capacity by $2.1 trillion (Masters 6). In 2012, the government used a similar strategy to prevent another debt crisis. Again, in February 2013, the Obama administration suspended existing laws on debt defaults to allow for more time for legislators to increase the debt limit. This happened in May 2013, before Congress raised the debt limit by $305 billion (Masters 6).
Raising the debt limit is only one strategy adopted by the U.S. government to manage its debt problems. However, economists have suggested other solutions to this problem. For example, Masters (5) says the U.S. Treasury could adopt extraordinary measures to prevent a default.
Relative to this observation, he says such measures could include, “under-investing in certain government funds, suspending the sales of unmarketable debt, and trimming or delaying auctions of securities” (Masters 5). Before the U.S. Congress increased the national debt limit, in May 2011, the U.S. Treasury adopted such measures for some time. The department also adopted the same measures in January 2013 and May 2013 when the country faced similar debt crises.
Conclusion – Proposed Recommendations
The current U.S. debt (of more than $16 trillion) is huge. Based on its sheer volume, Americans should acknowledge that this debt is “too big” for the country to pay at once. Therefore, it needs extraordinary measures to manage the problem and solve it completely. For example, as opposed to the U.S. Congress constantly increasing the national debt limit to meet the country’s financial obligations, it needs to discuss the root causes of the problem – debt escalation and deficit spending.
This strategy is a private-sector approach that many corporations, which have too much debt, use to manage similar problems. For instance, when companies incur too much debt, they turn to their shareholders to help them with their financial problems. The U.S. Treasury needs to adopt the same strategy.
Based on the above recommendation, the government needs to set up a central fund for “pooling” vital resources from the country’s “shareholders” and lower the national debt levels. The main goal of establishing this fund is to buy back some debts (say 15% of the total debt) and lower the national debt burden by about $1.5 trillion. This measure would lead to a 7% reduction of the public debt to Gross Domestic Product (GDP) ratio.
Based on the nature of this recommendation, people could easily ask where the money will come from. The key to raising about $1.5 trillion to buy about 15% of the national debt exists in tapping into the nationalistic spirit that made America the biggest democracy in the first place. Indeed, patriots, who made America the greatest country in the world, built it from a nationalistic spirit. Leaders should harness this spirit as a “rallying call” for the American people to help the country to get out of debt.
Particularly, the U.S. Treasury should target about 150 million taxpayers, living in the country, to give some money to the central fund. If every person contributed about $3,000, the department would get about $450 billion (one-half of the desired debt purchase price).
Since some people would not afford this amount, the nation’s leadership should play an instrumental role in requiring wealthy Americans to pay more money to the fund to cover those that cannot pay. This strategy would also expound on the national debate that focuses on whether wealthy Americans should pay more tax, or not. Nonetheless, based on the merit of the proposed strategy, wealthy American citizens should make huge financial contributions to the government to lower the nation’s debt load.
Besides targeting the citizens, the government could also target some giant American corporations, which have many idle cash reserves in overseas accounts, to contribute to the central fund. Indeed, some U.S. corporations have repatriated some of their money to overseas accounts because they want to avoid domestic taxes for saving at home. If the government allows these corporations to bring back their money, tax-free, they will do so.
However, it needs to create a “caveat” for this provision, which requires a significant part of the money to go to the national fund, for debt reduction. This measure would further reduce the debt burden. Overall, the government should move away from adopting “superficial” solutions, such as introducing stimulus plans, or debt swaps, because they fail to discuss the real problems contributing to the nation’s rising debts.
Works Cited
Gosling, James and Marc A. Eisner. Economics, Politics, and American Public Policy. 2nd ed. New York, NY: M.E. Sharpe, 2013. Print.
Howell, William, and David M. Brent. Thinking about the Presidency: The Primacy of Power, Princeton, NJ: Princeton University Press, 2013. Print.
Irving, Susan. Debt Management: Treasury was Able to Fund Economic Stabilization and Recovery Expenditures in a Short Period of Time, but Debt Management Challenges Remain, New York, NY: DIANE Publishing, 2010. Print.
Masters, Jonathan. U.S. Debt Ceiling: Costs and Consequences. 2013. Web.
Maugham, Craig. Surviving the Debt Crisis, New York, NY: eFortune US. 2008. Print.