Public Administration Most Important Economic Problem Essay

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Public Administration

Most Important Economic Problem

Without any iota of doubt, the most significant economic problem is our swelling national debt. To give an indication of the serious nature of the problem, all we have to do is to compare the federal budget deficit from 2008 with the next year. In 2008, the federal deficit stood at $459 billion but the impact of housing mortgage bubble and the recession that ensued increased the national debt to a staggering $1.4 trillion which when equated becomes $4,500 for every American. Future projections are even scarier with the debt slated to cross $16 trillion within the next decade. National debt also increased a whooping 32% from around $9 trillion in Sep 2008 to more than $12.4 trillion in March 2010. [IOUSA, (2008)] Including other federal programs such as Medicaid, Medicare and social securities into the equation shows a difference to the tune of $6 trillion between sep 2008 and mar 2010. The growing national debt is indeed a real economic crisis for our nation. With our GDP close to $14.6 trillion, the public debt to GDP ratio now stands at .6164 or close to 62% of the GDP. [IOUSA, (2008)] The grave nature of the problem calls for swift changes in policy stands.Download full Download Microsoft Word File
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To balance this budget deficit, the U.S. had to borrow funds from other countries. For the year 2009, China was the biggest lender giving $895 billion followed by Japan at $766 billion. [IOUSA, (2008)] Economists project that if the current trend is left to continue these lenders would be less inclined to fund our deficits leaving us with no option but to take dire measures such as raising interest rates, or raise taxes. As Federal Reserve Chairman Ben Bernanke reported to the congress, "Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,"[FoxNews] The fact is that our interest payments on debt was $452 billion in 2009 making it one of the largest segments of the budget behind Social securities, Medicare, Medicaid and Defense. The main reasons for the soaring debt is the huge spending on the Iraq and afghan wars, and the economic stimulus packages released by the government to tide over the recession. [FoxNews]

President Obama's signing of the Paygo bill is considered a first positive step in the right direction in controlling the growing budgetary deficits. The government should also focus on implementing 'spending caps' on the discretionary spending items on the national budget. The spending on defense programs should be carefully analyzed and reforms initiated to bring more cuts into military expenditures. If these stringent measures to reduce our discretionary expenses are not initiated now, we incur the risk of ending up paying as much as 92% of our earned revenue on paying interests for our national debt by 2019. [IOUSA, (2008)]

Reforms are also needed in the entitlement programs such as social security, Medicare and Medicaid. It is estimated that the deficits for social security payments will reach $300 billion by 2025 and the trend is projected to grow further to $1 trillion by 2048. [IOUSA, (2008)] Economists suggest that one of the effective starting points to reform social securities would be to consider raising the retirement age of people so they could continue to earn and save past 65. Increasing the payroll tax ceiling is also a suggested solution. Social securities benefits could also be reformed to be more beneficial for the less privileged low-income group. These minor adjustments to the current social security system would help to gradually reduce the growing deficits in funds for the program. The Social security solvency act introduced by Senator Bob Bennett in February 2009 clearly expounded the financial underpinnings of the projected changes in the social security demographics. As the Senator stated in his speech to the congress, "The Social Security program is outdated and not equipped to address today's and tomorrow's demographic realities. I have introduced legislation that would fix the looming Social Security crisis by ensuring that when our children and grandchildren retire they will receive roughly the same levels of benefits as current retirees do today; and it does it without raising taxes." [Senator Bob Bennett]

Last but not the least in controlling our national debt is the reforms to our healthcare system. Health economists suggest that even one tenth of a percent of reduction in heath care spending would result in saving more than $4 trillion over a period of time. [IOUSA, (2008)] Moving away from 'fee for service ' payment system is one of the important suggestions. Next in the agenda to make the healthcare system more efficient and less expensive is the implementation of electronic medical recording system. Currently only 8% of the 5,000 hospitals across the nation use electronic records and so expanding this system uniformly across the nation would itself incur additional expenditure to the tune of $75 to 100 billion. However, thorough implementation of electronic medical recording system could save up to $300 billion dollars in a year. As president Obama who supported the standardized electronic medical recording system said, "This will cut waste, eliminate red tape, and reduce the need to repeat expensive medical tests. It just won't save billions of dollars and thousands of jobs -- it will save lives by reducing the deadly but preventable medical errors that pervade our health care system," [David Goldman] These reforms would help reduce the rate of growth of health care expenditure. Finally, it is also necessary to promote prevention and fitness programs. Media should be effectively utilized to advertise Healthy lifestyle choices.

Reducing the national debt is a high priority economic issue. It is a complex problem and therefore requires a multifaceted approach. We have to focus on implementing reforms to cut our defense spending, to restructure our social security system and to make our healthcare entitlement programs more efficient and cost effective. There is no question of doubt that such broad scaled measures require bipartisan support and our political parties should cooperate in the efforts to control our national debt.

Economic Growth

Economic growth is affected by four general factors. These include the availability of natural capital, Human resources, supply of capital goods and technological progress. For production to be sustained the aggregate demand should also be steadily increasing. While increase in productive capital is crucial for economic growth, it alone is not enough to continue to stimulate the economy in the long run. Capital-intensive economies do not gain much by simply increasing productive capital. Instead, such capital investment alongside technological innovation is the key to further the growth. This can be inferred from comparing the economic growth of mature and developing economies. For instance U.K's economic growth stabilized at around 2.7% of the GDP between 1995 and 2005 and U.S. averaged at around 3% during the period. However, in the similar period China and India achieved a remarkable 9.2% and 6.2% average growth rate owing largely due to the increased capital inflows. [Stephan Pfeffenzeller] In the case of India, the liberalization policies of the 1990's resulted in increased FDI inflow and increase in productive capital. Once these Asian economies achieve higher capital intensity comparable to the developed economies, further growth will depend on technological innovation rather than just on increased capital inflow.

Open Trade polices also positively affect economic growth as they increase the demand for goods. However, for economies to perform well in the open markets they need to innovate. The sectors in which an economy is most innovative will contribute greatly to the trade growth by increasing the export margins. Germany is a case in point. As the World's largest exporter German economic growth is dominated by the exports from its industrial sector. [Stephan Pfeffenzeller] Technological innovation made possible for Germany to achieve a stable GDP growth of 2.81% even in 2009 when the rest of the mature economies were reeling under recession. [Economy Watch]

Inflation is an attendant issue with a fast growing economy. Inflation control is a key to sustaining economic growth. Though lower rates of inflation are unavoidable the major economic crisis will result if inflation is left uncontrolled. Since inflation influences investment decisions it has an indirect impact on the future economic growth of a nation. Inflation affects the macro economic variables. It creates an imbalance, as increase in commodity price is not matched by an increase in income, which in turn affects the purchasing power and the demand for goods. Also since inflation affects exchange rates it also has a negative effect on trade exports, which ultimately dampens economic growth.

The economy of a nation always follows a cycle. Though good macroeconomic and fiscal policies can help to sustain positive economic development it cannot continue forever. Contraction is part of the economic cycle. The global economic cycle has different phases namely- Boom, recession, recovery and expansion. Economic boom is a period of intense growth of the economy characterized by decreased unemployment rate, boom in housing market,… [END OF PREVIEW] . . . READ MORE

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