Paige Brinton

Paige Brinton

October 16, 2011

Math 49s

Debt

America, we are meant to be a ‘city upon a hill’[1], an example for the world to follow and here we are currently $14.3 trillion dollars in debt. Are we truly the success that we believe we are? It is an irrefutable fact that these current economic troubles are not occurring exclusively in America. One can open any newspaper on any given day and read about a different country’s economic struggles as their economy falls on hard times. While the recession may have finally sprung upon us in December 2007 it does not appear to be going away anytime soon. Money (or lack thereof) seems to be the topic of every conversation and the worry in every household. The debt issue is looming in the back of everyone’s mind, and leads us to ask three questions: How did America acquire all of this debt?, What is the government doing to help our economy recover?, and Is this the best way to raise America out of the recession?

America is in debt due to budget deficits. The United States is cutting taxes while spending too much. The graph below shows a breakdown of the debt from Obama’s policies to Bushes polices: [2]However, foreign countries such as China own over thirty percent of the USA’s Treasury bonds keeping America’s interests rates low. This also allows China to keep the value of the Yuan (China’s currency) low and has caused a trade deficit between the US and China. Unfortunately, America needs China to buy treasury bonds in order to fund things such as Barack Obama’s 2009 stimulus plan. Obama decided to put money into the Economy to hopefully increase employment and spending.

It is often said that history repeats itself and one does not need to look far into America’s history to find the same troubles we are going through now. A little over eighty years ago, in the 1930s, under Herbert Hoover and Franklin D. Roosevelt’s presidencies occurred the Great Depression. In order to bring America back from this depression Roosevelt implemented the New Deal. The New Deal was a series of economic programs to try and repair America by using Keynesian Economics. President Barack Obama claims John Maynard Keynes’ economic theory is also at the foundation of his debt plan. Keynes was a twentieth century, British economist who proposed the idea that ‘when national economies suffer a downturn, governments should borrow and spend money to boost economic activity.’[3] It is argued that Obama is in fact giving the first world test of Keynes theory, Roosevelt’s New Deal did not completely follow Keynes, at the time, radical idea. Roosevelt did not spend as much money as suggested necessary by Keynes and raised taxes as well as putting money into the economy. While Roosevelt’s plan may have helped the economy recover in the thirties it did not manage to reform the system and prevent further recessions.

The success of Keynes theory has been widely debated across the world, leading to other countries deciding to follow other routes out of debt. In fact America started off at the end of 2008 with an idea supported by several anti- Keynesian economists. The Federal Reserve lowered interest rates to nearly zero percent, but this proved to be unsuccessful as the economy continued to worsen. I surveyed a group of first-year Duke University students to find out how they thought America’s debt situation was fairing compared to other countries. They were asked to rank countries in order of which they thought had the highest public debt as a percentage GDP. The USA won by every method with the UK in second. They were compared to Japan, Italy, Germany, Canada, China, Russia, and Brazil. In reality the USA and UK percentages are fairly low compared to some of these countries. Data[4] shows:

Country (% of GDP) Date of Information

1 / Zimbabwe / 234.10 / 2010 est.
2 / Japan / 197.50 / 2010 est.
3 / Saint Kitts and Nevis / 185.00 / 2009 est.
4 / Greece / 142.80 / 2010 est.
5 / Lebanon / 133.80 / 2010 est.
6 / Jamaica / 126.50 / 2010 est.
7 / Iceland / 126.10 / 2010 est.
8 / Italy / 119.10 / 2010 est.
9 / Singapore / 105.80 / 2010 est.
10 / Barbados / 102.10 / 2010 est.

With the UK ranking 24 and the USA 32. While these two countries might not be at the top of the list they are both constantly in the media’s spotlight, due to their world power and contrasting methods to relieving the recession.

The United Kingdom is taking a very different approach than its younger counterpart. Recently Obama created a $447 billion dollar plan to reflate the economy, but Britain’s Chancellor George Osborne has no intention of following Obama’s lead, for fear that it will ruin Britain’s current low interest rates. Osborne’s whole approach to reducing debt has differed from Obama’s approach. While Obama has embraced stimulus plans and putting more money into the economy, Osborne made the biggest spending cuts the UK had had in decades. In October 2010 Osborne cut twenty billion pounds or spending. The UK either needed to cut spending or raise taxes. The US appears to be generally opposed to the idea of raising taxes. This is a topic that current politicians are treading carefully on. Everyone is choosing their words carefully, rather than saying that they plan to raise taxes on the rich one says that taxes will become fairer. In order to understand the reason for this one must understand the American character. Since the first settlers arrived in America and the Boston Tea Party took place the American people have had a stance against taxes.

However, in a small survey I conducted, people actually seemed to be in favor of raising taxes given the current economic situation. The survey asked people to rank what they thought were the best ways to reduce national debt. The five choices they were given were: decrease government spending, quantitative easing, increase taxes, wage trade wars, and change nothing. The survey results showed that people were not happy with how the government is currently handling the economic struggles as participants ranked ‘change nothing’ last among all their options or chose not to rank it. The Condorcet winner and winner by all the methods: plurality, instant run off voting, top two run off, Schulze, borda count, instant run off borda count, least worst defeat, and ranked pairs, was ‘decrease government spending’. The second place by ranked pairs, borda count, and least worst defeat was ‘raising taxes’. Unsurprisingly, as people are unhappy with how Obama is trying to fix the debt crisis, ‘quantitative easing’ ranked only above ‘change nothing’ as it is the most Keynesian method.

There is not a clear ‘best’ way to lift a country out of a recession and recover from trillion dollars of debt. Both the United Kingdom and America have taken different approaches on recovery from the debt crisis and both governments have been heavily criticized. The UK is telling Osborne that ‘It's time for a Plan B.’[5] and neither the Republicans nor the Democrats are entirely happy with Obama’s latest debt deal. At the moment neither approach can guarantee the reform that everyone is looking for.

Bibliography

Boffey, Daniel and Stewart, Heather. “100 leading economists tell George Osborne: we must turn to Plan B.” Guardian.co.uk.29 Oct 2011. Web.

Conway, Edmund. “Barack Obama accused of making 'Depression' mistakes.” Telegraph.co.uk. 6 Sept 2009. Web.

“Obama Gives Keynes His First Real-World Test”. By Adam Davidson and Alex Blumberg. Natl. Public Radio. 09 Jan 2009. Web.

“Spending Review 2010: George Osborne wields the axe.” BBC.co.uk. 20 Oct 2010. Web.

Tully, Shawn. “How Obama got Keynes wrong.” Money.cnn.com. 5 Feb 2010. Web.

Warner, Jeremy. “Let's not be suckered into following Obama's lead.” Telegraph.co.uk. 9 Sept 2011. Web.

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[1]John Winthrop, A Model of Christian Charity

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