Macroeconomics Over the Last Several

Macroeconomics Over the last several years, the size of the national debt has been increasingly brought to the forefront. This is because there are ideological clashes about the role of the federal government and its size. The combination of these factors has created an atmosphere of contention among both sides. To fully understand what is taking place requires examining how the current policies are helping to promote long-term stability. This will be accomplished by focusing on the article Rethinking Debt (by Jared Bernstein).

Once this takes place, is when it will be clear, as to how the stimulus package is not a major contributor to the underlying levels of debt. Support the federal government's policies of increasing the national debt the recession of 2008? During the recession of 2008, is when the federal government began to become actively involved in helping to support institutions that were too big to fail. This is because corporations such as: insurance companies, investment banks and hedge / pension funds over leveraged themselves.

The way that this was accomplished is through underwriting and purchasing subprime mortgages. In the boom years, interest rates were low and most people had been purchasing homes (which helped to create a situation of easy terms and conditions for obtaining the loan). This is from: low mortgage rates and the lack of background checks inside most organizations. The combination of these factors increased the risks to the portfolios of financial institutions. Once the economy began to slow, is when a wave of defaults occurred.

This is because most banks did not evaluate if the buyer was overleveraged (during the underwriting process). At first, the majority of financial institutions believed that these issues would not affect their liquidity. Then, they began to impact the credit markets and the ability of consumers / businesses to obtain financing. This is when many of the large financial firms (i.e. Lehman Brothers) were forced into bankruptcy. To prevent these issues from creating a depression, the federal government offered direct support to financial institutions.

At the same time, there were steps taken to support the credit markets by purchasing this toxic paper and offering increased amounts of liquidity. This ensured that the economy was able to remain balanced (which prevented a depression). The problem is that many conservatives will point to how this increased the size of the federal government and the national debt. Moreover, many of these individuals believe that these programs are making the underlying economic recovery worse.

This is because the high levels of debt are contributing to a lack of confidence among consumers and businesses (which reduces spending). In the article that was written by Bernstein (2012), he argues that the stimulus package was necessary and that it is not contributing to the national debt. Instead, it is the Bush tax cuts and the wars in Iraq / Afghanistan that are creating these high levels.

Evidence of this can be seen with Bernstein saying, "What's largely behind the structural deficits in recent years (controlling for the cyclical downturn) -- is the decline in revenues from the Bush tax cuts and their extensions, not to mention the wars in Iraq and Afghanistan. Since their introduction in the early 2000s, the tax cuts have diminished the nation's tax bill by hundreds of billions every year. Over the next ten years, they are expected to add $3.6 trillion to the debt.

Without these cuts, our medium-term budget (say, over the next decade) would be sustainable. As long as new revenues are off-limits, attacking the deficit is equivalent to attacking the functions of government. That gives the anti-deficit argument strong ideological support from small-government advocates. But there are others who are not motivated by anti-government ideology but are misguided nevertheless. The Recovery Act, with a price tag of about $800 billion, was a historically large stimulus, and it was wholly paid for by borrowing.

But by 2012 it will add less than 0.5% to the deficit-to-GDP ratio, and nothing to the growth in the debt (it does add to the level of debt, of course; in other words, it raises the share of debt to GDP, but it does not contribute to the growth in that share).

The Bush tax cuts, on the other hand, which are essentially permanent in terms of ten-year budget windows, keep adding to both annual deficits and the growth of the debt -- on the latter point, they add 20% to the debt-to-GDP ratio this year and, if they remain in place, 34% by 2019." This is significant in showing how the stimulus package was not a main contributor to the national debt. Instead, it was two wars, a rough economy and the Bush tax cuts. As.