Question

Given the 5 methods of dealing with national debt, which one would impose the GREATEST cost to the economy? Explain.

5 Methods

1. Do Nothing

2. Balance Budget Amandment

3. Levy a special tax

4. Monetize the debt

5. Sell off assets

Answer 1

If national debt is utilized for productive activities, it can lead to rise in growth rate of country. But sustained rise in the public debt can cause irreparable damage to economy. Following method would have greatest cost to the economy:

Do nothing: Doing nothing to rein in public debt would cause eroding of investors trust in economy. Thus, in long run, investors would move out country to safer destinations.

Doing nothing would keep on piling up the public debt. It would become beyond the means of government. There are many instances where many economies were ruined by following same method of dealing with public debt.

Crisis in PIGS countries is an glaring example of doing nothing substantial to deal with public debt.