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The National Debt: Different theoretical views on the national debt.

The National Debt: Different theoretical views on the national debt.

During the Great Recession, like any other economic downturns, as unemployment rises, aggregate income
declines causing a major decline in tax collections. On the other hand, with the rise in unemployment, spending
on safety net programs rise. So, to stabilize the national economy, government appears to have only two
options (neither good) either to put in place severe austerity measures (cut spending) or increase borrowing. Of
course, it is very difficult to defend cuts in the federal government programs and especially the programs
geared to sustain the minimum of the standard of living for the “poor.” But increase in borrowing has major
adverse impacts on the national economy.
Write an essay analyzing
· Different theoretical views on national debt,
· Long-run costs of high national debt,
· Costs of eliminating the budget deficit solely through (1) personal tax increases, and/or (2) through spending
cut by decreasing in transfer payments (i.e., Social Security, Medicare and Medicaid) and in discretionary
spending (such as defense and education budgets).


In the modern express viewpoint, the wants constantly raise therefore, their state must spend more to fulfill these requires. Public expenditures are generally met by ordinary public revenues such as taxes, duties, fees, parafiscal revenues, property and enterprise revenues, taxes, and penalties. However, the state is faced with the public sector deficit due to reasons such as large infrastructure investments, war, development financing, natural disasters, economic crises, budget deficits, as well as the ever-increasing ordinary public expenditures. To overcome this situation, they refer to borrowing.

Borrowing will be the getting of capital and similar beliefs for repayment right after a a number of length of time. Public borrowing refers to the legal obligation of the state to pay back the principal and interest to the holders of the predetermined rights in accordance with a certain schedule. Public credit and public borrowing referred as state borrowing in the economic literature mean debts taken by government or other public institutions [2].

Governments in ancient and middle ages ages essential funding, as with contemporary suggests. But governments did not borrow “publically” in the concept of drawing funds from a large populace and paying principal and interest, as like deferred taxes [3].

Within the thirteenth century, community borrowing, which include even king’s credit, was initially scientifically evaluated by Charles Davemont in 1710. Thereafter, economists such as David Hume, Adam Smith, D. Ricardo, Malthus, J.S. Mill, J.B. Say, A.P. Lerner, and A.G. Hart have worked on borrowing. Smith and Ricardo opposed public borrowing. In their view, borrowing can be spent irresponsibly because of being an easy income; so that causes deterioration in the functioning of economic life. In this context, the classics have advocated that capital is wasted, and the debt burden is transferred to the next generations due to the inefficiency of public expenditures [4]. In addition, classics have defended that borrowing could be in some case such as large infrastructure investment and war but emphasized that it should be limited and not be kept on.

People borrowing insurance policies around the world have especially skilled a converting position with all the Entire world Conflict I (1914–1918) along with the Great Depression (1930s). During the period in question, John Maynard Keynes had proposed public borrowing as a war financing to England and argued that it would be useful. In the process that started with this proposal, public borrowing became an indispensable source of financing for the states. This situation does not mean that states participated in Keynesian theory. While public borrowing becomes an indispensable source of financing, it also brings the debt-interest cycle, poverty, and crises. The result of public borrowing leaves a great burden on the next generations. This situation has justified the classics [4].

Especially after the World War 2, public borrowing suggested both significant raise and architectural alterations on account of on the one hand the restoration performs of the countries impacted by the warfare, alternatively, the financing requirements of developing nations [5]. In the following period, the borrowing process are no longer interstate and have started to gain a new dimension by establishing international organizations such as International Monetary Fund (IMF), World Bank (WB), International Finance Corporation (IFC), International Development Association (IDA), European Investment Bank (EIB), and Islamic Development Bank (IDB).

In the process of globalization, the flexibility of funds has grown and critical monetary levels of competition has appeared in global market segments.

Particularly, establishing countries around the world have sought to work with these to improvement funding by appealing to global brief-term investment capital actions with their countries through various bonus tools (like very low taxation, high rates of interest, and many others.). However, both the sudden fluctuation in capital movements and the implemented incentive mechanisms have dragged the developing countries to the external debt spiral.

Productive and unproductive debts are also offered. If the debts are used in construction, such as railways, power stations, and irrigation projects, which contribute to the productive capacity of the economy, they denote to productive debts. By this way, productive debts provide a constant flow of income to the state. The state generally pays the interest and principal debt amount from these projects’ revenues. If the debts are used in the area such as war, famine relief, social services, etc., which do not contribute to the productive capacity of the economy, they denote to unproductive debts. The state generally pays the interest and principal debt amount from taxes; therefore, these debts are a burden on society.

These days, swiftly growing worldwide associations have risen the significance of additional obligations. The less developed and developing countries have to refer to external borrowing for the realization of their economic development. The lack of adequate capital markets for development in these countries and the insufficient number of technical materials and personnel required external resources. As a matter of fact, these are the main reasons for applying to external borrowing in the Ottoman Empire and the Turkish Republic periods before internal borrowing.

Internal and external borrowing amounts are adversely progressed in less developed and developed countries. According to this, the debts of developed countries are predominantly internal debts; the debts of less developed and developing countries are mostly external debts. Because in developed countries, the state can easily provide the debts needed by own internal sources. It is also important from where and how the sources of funding are provided in a country’s economy as well as how these resources are channeled back into the economy [13].

As it is acknowledged, additional credit has a increasing result on countrywide income when used and possesses a decreasing effect on nationwide income when compensated. Because of these features, it is important to use for what purpose of external borrowing. For instance, the development credits, that are provided in order to invest in economic development and increasing the existing investments, contribute to the economy by using the programs and projects included in the development plans. Development credits are dealt within four groups.