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Deficit spending the deficit good or bad

Deficit Spending: The Deficit Good or Bad

"Spending financed not by current tax receipts, but by borrowing or

drawing upon past tax reserves." , Is it a good idea? Why does the U.S. run a

deficit? Since 1980 the deficit has grown enormously. Some say its a bad thing,

and predict impending doom, others say it is a safe and stable necessity to

maintain a healthy economy.

When the U.S. government came into existence and for about a 150 years

thereafter the government managed to keep a balanced budget. The only times a

budget deficit existed during these first 150 years were in times of war or

other catastrophic events. The Government, for instance, generated deficits

during the War of 1812, the recession of 1837, the Civil War, the depression of

the 1890s, and World War I. However, as soon as the war ended the deficit

would be eliminated and the economy which was much larger than the amounted debt

would quickly absorb it. The last time the budget ran a surplus was in 1969

during Nixon's presidency. Budget deficits have grown larger and more frequent

in the last half-century. In the 1980s they soared to record levels. The

Government cut income tax rates, greatly increased defense spending, and didn't

cut domestic spending enough to make up the difference. Also, the deep recession

of the early 1980s reduced revenues, raising the deficit and forcing the

Government to spend much more on paying interest for the national debt at a time

when interest rates were high. As a result, the national debt grew in size after

1980. It grew from $709 billion to $3.6 trillion in 1990, only one decade later.

Increase of National Debt Since 1980

Month Amount


12/31/1980 $930,210,000,000.00 *

12/31/1981 $1,028,729,000,000.00 *

12/31/1982 $1,197,073,000,000.00 *

12/31/1983 $1,410,702,000,000.00 *

12/31/1984 $1,662,966,000,000.00 *

12/31/1985 $1,945,941,616,459.88

12/31/1986 $2,214,834,532,586.43

12/31/1987 $2,431,715,264,976.86

12/30/1988 $2,684,391,916,571.41

12/29/1989 $2,952,994,244,624.71

12/31/1990 $3,364,820,230,276.86

12/31/1991 $3,801,698,272,862.02

12/31/1992 $4,177,009,244,468.77

12/31/1993 $4,535,687,054,406.14

12/30/1994 $4,800,149,946,143.75

10/31/1995 $4,985,262,110,021.06

11/30/1995 $4,989,329,926,644.31

12/29/1995 $4,988,664,979,014.54

01/31/1996 $4,987,436,358,165.20

02/29/1996 $5,017,040,703,255.02

03/29/1996 $5,117,786,366,014.56

04/30/1996 $5,102,048,827,234.22

05/31/1996 $5,128,508,504,892.80

06/28/1996 $5,161,075,688,140.93

07/31/1996 $5,188,888,625,925.87

08/30/1996 $5,208,303,439,417.93

09/30/1996 $5,224,810,939,135.73

10/01/1996 $5,234,730,786,626.50

10/02/1996 $5,235,509,457,452.56

10/03/1996 $5,222,192,137,251.62

10/04/1996 $5,222,049,625,819.53

* Rounded to Millions

Federal spending has grown over the years, especially starting in the

1930s in actual dollars and in proportion to the economy (Gross Domestic Product,

or GDP).

Beginning with the "New Deal" in the 1930s, the Federal Government came

to play a much larger role in American life. President Franklin D. Roosevelt

sought to use the full powers of his office to end the Great Depression. He and

Congress greatly expanded Federal programs. Federal spending, which totaled less

than $4 billion in 1931, went up to nearly $7 billion in 1934 and to over $8

billion in 1936. Then, U.S. entry into World War II sent annual Federal spending

soaring to over $91 billion by 1944. Thus began the ever increasing debt of the

United States.

What if the debt is not increasing as fast as we think it is? The dollar

amount of the debt may increase but often times so does the amount of money or

GDP to pay for the debt. This brings up the idea that the deficit could be run

without cost.

How could a deficit increase productivity without any cost? The idea of

having a balanced budget is challenged by the ideas of Keynesian Economics.

Keynesian economics is an economic model that predicts in times of low demand

and high unemployment a deficit will not cost anything. Instead a deficit

would allow more people to work, increasing productivity. A deficit does this

because it is invested into the economy by government. For example if the

government spends deficit money on new highways, trucking will benefit and more

jobs will be produced. When an economic system is in recession all of its

resources are not being used. For example if the government did not build

highways we could not ship goods and there would be less demand for them. The

supply remains low even though we have the ability to produce more because we

cannot ship them. This non-productivity comes at a cost to the whole economic

system. If deficit spending eliminates non-productivity then its direct monetary

cost will be offset if not surpassed by increased productivity. For example in

the 1980's when the huge deficits were adding up the actual additions to the

public capital or increased productivity were often as big, or bigger than the

deficit. This means as long as the government spends the money it gains from a

deficit on assets that increase its wealth and productivity, the debt actually

benefits the economy. But, what if the government spends money on programs that

do not increase its assets or productivity. For instance consider small

businesses. If the company invests money to higher a new salesman then he will

probably increase sales and the company will regain what it spent hiring him. If

the company spends money on a paper clips when they have staplers they will just

lose the money spent on the paper clips. This frivolous spending is what makes

a deficit dangerous. Then the governments net worth decreases putting it into

serious debt.

Debt should not be a problem because we can just borrow more, right?

This statement would be correct if our ability to borrow was unlimited, but it

is not. At first the government borrowed internally from private sectors. The

government did this by selling bonds to the private sectors essentially

reallocating its own countries funds to spend on its country. This works fine

in a recession, but when the country is at or near its full capability for

production it cannot increase supply through investment of deficit dollars.

Deficit dollars then translate into demand for goods that aren't being produced.

Referring back to the small business example, if a company is selling all the

products it can produce they can still higher another salesman. But since there

are no more goods to be sold the salesman only increases the number of consumers

demanding the product. Without actually increasing sales.

The problems of deficit spending out of a recession even out through two

negative possibilities, inflation and crowding out. Inflation means there is

more demand or money than there are goods this causes an increase in prices and

drives down the worth of the dollar. This depreciation of the dollar counters

the cost of the deficit but destroys the purchasing power of the dollar. A five

dollar debt is still a five dollar debt even if the five dollars are only worth

what used to be a five cent piece of bubblegum. Despite its dangers inflation is

used to some extent to curb the debt. Crowding out is when the government is

looking for the same capital that the business sector wants to invest. This

causes fierce competition for funds to invest. The fierce competition causes an

increase in interest rates and often business will decide against further

investment and growth. The government may have the money to build new highways

but the truckers cannot afford trucks to use on them. The governments needs will

"crowd out" business needs. This turns potential assets into waste.

However, there is a third option which would allow the government to run

a deficit and avoid the negative aspects of inflation and crowding out.

Borrowing from foreign sources is a tangible and recently very common practice.

Attracted by high interest rates and stability, foreigners now buy huge amounts

of U.S. national debt. Of course this cannot be the perfect solution otherwise

no one would be concerned about the debt. The problem with borrowing from

external sources is the lack of control the government has over foreign currency

and debts. Internal debts can be paid with increased taxes, inflation, and other

monetary controls the government has but external debts can extremely damaging

to a country if it cannot buy enough of the foreign currency to pay the interest.

Running a deficit is apparently good for an economy that is operating

inside its production possibilities curve but it can be damaging to an economy

operating on the curve. A deficit managed properly has the effect of increasing

demands. An economy inside its curve can increase supplies in reaction. An

economy on the curve can increase demand but its supplies cannot increase

causing prices to rise, or inflation. If there is no deficit and the curve

shifts to the right then supplies will not increase and the country will no

longer be operating on the curve. A deficit must be maintained to insure that

the economy grows with its resources.

Is the U.S.'s current debt bad or good? The trick is finding out how

large the deficit should be in order to allow for growth without waste. The

U.S.'s deficit is bad at this point because the U.S. is close to its maximum

production capabilities, and deficit money is being wasted. For example two of

the largest portions of the budget: defense and social security. Defense

spending produces little or nothing except in times of war. Judging by the

current status of the United States as the only existing "Nuclear Super Power"

war is not a tangible event in the near or distant future. The way social

security is managed creates a huge waste. As managed, social security is money

spent to immobilize a large and fairly capable part of the work force. It

encourages elderly people not to work by spending deficit money on them.

Reducing productivity and increasing the debt at the same time. In its current

state the U.S. should attempt to reduce its deficit but eliminating it is not

necessary and could do more damage than good.

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