National Debt Economic Impact Classical Keynesian Theory Research Paper

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National Debt


Three schools of thought on the economic effects of national debt are the Classical school, the Keynes school, and the school of Modern Monetary Theory (MMT). The Classical view is that high national debt can undermine long-term economic growth. The Keynes school views national debt more as a tool for growth and stability rather than as a problem for growth. MMT school argues that high national debt is basically a boogeyman, for governments can always just inflate the debt away by creating more money supply. This of course has its own problems, as loss of confidence in a currency can erode its value as an asset (Barrows, 2022).
The Classical theory is based on the notion of equivalence, put forward by David Ricardo: when the government finances deficits by borrowing, the consumer can reasonably expect that the debt will eventually have to be paid back. This happens by way of taxation. In effect, the government borrows from future generations or pulls forward the expected wealth of tomorrow for uses today. That is why classical economists argue that excessive government borrowing can lead to stagnation, as interest rates have to rise to attract buyers of debt and private investment bows out of investing in the economy because interest rates are too high (Barrows, 2022).
Keynesian economists argue that national debt is a useful and necessary tool for bringing stability to the economy. It is most helpful during recessions: governments intervene by spending to create demand. This keeps businesses in business, workers employed, and the economy growing. The idea is that governments should borrow when there are downturns and reduce their debt when the economy is able to grow on its own once again. The problem is that too much intervention for too long creates distortions, zombie companies, and artificial economies that are centrally controlled.

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For a high national debt to not be a problem, the borrowed funds must be used to stimulate economic activity and the economy must grow at a rate that outpaces the debt burden. Considering the amount of government…

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…President Trump has argued. If it chooses taxes, no one likes that. Voters remember it. It reduces disposable income. It can cause political backlash. If it chooses spending cuts, it means cutting down on social programs. Again, this is not a win for many citizens. It can cut spending, as on defense and education or infrastructure—or it can go after government waste the way the Department of Government Efficiency is now doing in exposing USAID. Cutting spending, raising taxes—these are not popular—but eliminating waste can be a huge gain.


Conclusion


Theories about national debt range from classical (it is not good), to Keynesian (it is a good tool), to MMT (it is not bad). The fact is that debt has to be managed effectively. Keynesian theory has its limits and MMT is simply like wearing blinders. The classical view is the most realistic. Too much debt creates problems. Addressing budget deficits through tax increases or spending cuts also presents problems. For a nation addicted to debt, the best thing to do is eliminate waste. Tax increases….....

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