deficit budget (US) better or worse?
...7.93 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” busine...