Business & Marketing Essay: Analyzing essay

Analyzing Essay
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Analyzing Essay
The national debt is a topic that many economists, market observers, legislators, and ordinary citizens have debated for centuries. A country's national debt is viewed as a significant determinant of economic performance. Currently, Japan has the highest national debt. However, the country renowned for its debt to GDP ratio and because it is the most powerful nation in the world is the United States (U.S.). The U.S. has a national debt of more than $20 trillion, and although its debt to GDP ratio is significantly smaller than that of Japan, it is still in the top 20 (Furman & Summers, 2019). A high national debt puts pressure on the government to cut spending and introduce severe austerity measures. Yet, as often is the case, austerity is not popular with the public. Also, it is not feasible, especially in a country such as the U.S., where social security is a central economic policy. In this paper, the author analyzes national debt by exploring the different theoretical views, the long-run costs of the high national debt, and the cost of eliminating budget deficit through tax increases or reduced spending.
In "The Wealth of Nations," Adam Smith sought to debunk the argument that national debt is not a problem because citizens owe it to themselves. Adam Smith believed that national debt is not right for an economy (Paganelli & Schumacher, 2019). One of the reasons he cited is that national debt leads to a perversion of the economy. When a country operates on the national debt, it shifts spending from productive and peaceful activities to costly affairs such as war. War is often presented as a cheap undertaking, but it is costly. Also, national debt tends to encourage spending on the public instead of private uses. The result is increased taxation, which reduces capital accumulation (Paganelli & Schumacher, 2019).
John Maynard Keynes held a different view from Adam Smith. Keynes saw national debt as necessary and not to be feared. According to Keynes, during a recession or depression, a reduction in consumer spending could be checked by increasing government spending (van Staveren, 2021). Keynes held this view because he saw maintaining aggregate demand as the solution to high unemployment. When an economy grows again, full employment can be reached and the accumulated national debt paid. If government spending led to an increase in inflation, Keynes found an increase in taxes could help drain extra capital from the country (van Staveren, 2021).
One of the long-run costs of the high national debt is reduced national income and savings. A high national debt causes a decrease in investment and an increase in interest rates (Boskin, 2020). As the government borrows more, the percentage of savings used for investment is directed towards securities. Another cost of the high national debt is a decrease in the ability to solve problems. When a government borrows, it can meet unexpected costs such as financial crises, natural disasters, and wars. These unexpected costs can be easily met when the governmen...