Paying Off the Federal Debt: The Pros and Cons

Why Paying Off the Federal Debt is Not Always as Simple as It Seems

Money, be it in the form of paper currency or digital transactions, is the backbone of modern economic activities. Transactions flow seamlessly through currency, but in the absence of currency, the flow of business and transactions would come to a standstill. All the currency that exists today is issued through two primary avenues. First, the government issues bonds, which the Federal Reserve then buys using newly created money, promising to pay back with interest. Second, banks issue loans, which create new money.

The Political Implications

From a political standpoint, paying off the federal debt would be a contentious issue. Republicans have argued that if the debt were paid off, Democrats would quickly run up the debt again, negating the efforts. However, the reality is that paying off the debt is not a priority in the current political climate, as it does not offer significant political benefits.

How Government Debt Affects Economic Growth

There are valid arguments to suggest that government debt can slow economic growth. According to economist analyses, the U.S. economy is currently being slowed by government debt at a rate of 2-3 percent. For every 2.5 percent growth in the economy, two or three percentage points are being offset by the presence of government debt. Without the encumbrance of government debt, the projected 2.5 percent growth could reach as high as 4.5 to 5.5 percent. This kind of economic growth is rare, and reducing the debt could significantly benefit the economy.

A Practical Approach to Reducing the Federal Debt

While paying off the debt in one fell swoop could be catastrophic, a slow and steady approach could be beneficial. There is a practical solution that could achieve this goal over time. The key idea is to tax the vast amount of transactions that occur electronically every year in the U.S.

The amount of money moved electronically in the U.S. is in the quadrillions—around four to five quadrillion dollars. Let's assume it to be four and a half quadrillion dollars. By imposing a tax of a tenth of a penny per dollar, every time ten dollars moves, the tax collects a penny. This would yield a revenue of approximately four and a half trillion dollars. Given that the national debt is over twenty trillion dollars, this would take roughly five years to pay off.

However, the government is continuously adding debt at around two trillion dollars annually, not to mention the unknown additional debt due to the coronavirus situation. Therefore, the net reduction in debt would be about two trillion dollars per year, taking ten years to pay off the debt. This approach could also reduce the amount paid in interest on the debt, allowing for an allocation to fix the nation's highways.

The Benefits of Reducing the Federal Debt

By taxing electronic transactions, the revenue generated could be used to reduce the debt while improving the nation's infrastructure. The debt reduction would also benefit the Social Security Fund, allowing it to gain higher interest rates through the performance of the stock market rather than the government's fixed interest rates. Additionally, the economy would likely grow faster as the debt burden is reduced, leading to a more robust and sustainable economic environment.

In conclusion, while paying off the federal debt is a complex and challenging task, a thoughtful and strategic approach can lead to significant economic benefits. Balancing the need to reduce debt with the practical realities of the economic and political environments can pave the way for a healthier and more prosperous future.