Deficit Spending, Essay Example

Depending on which government economist you asked, you will get a wide variety of pro and con thoughts about the government deficit spending. The pros believe that deficit spending is necessary to run any government effectively generating and stimulating the economy when needed. Deficit spending by the government that exceeds the available funds in the budget to stimulate business while giving the economy a boost to recover. On argument (1): it’s still true that an increase in government spending raises future debt. But not one for one: because higher spending raises GDP, it leads to higher revenue, which offsets a significant fraction of the initial outlay (Krugman, 2009). The government will pay the money borrowed back at a later time, when the economy is generating an increase. The simply definition is the amount which the government spends exceeds budgeted income over a specific period of time is called a budget deficit. Traditionally, deficit spending has been good in stimulating the economy to be prosperous, however, certain deficit spending warrants legislation to curtail where the government is borrowing the funds.

Disadvantages

The best example of  the disadvantages of Deficit Spending is the excess Social Security funds. Social Security has collected billions of surpluses from every individual in the United States. In addition, to the Americans that die before they reach retirement age. They have left millions to the government to run Social Security. Instead of cutting other problems over the last 50 years, the government has borrowed from the Social Security funds causing this hugh deficit. In this example, Deficit spending is not good for America.

Advantages

The advantages of deficit spending are based on the ability to jump-start a struggling economy. The government must be prepared to improve the economy by strategically using deficit spending tactics. For example, the automobile industry was about to break-down the stock exchange as well as cause a new Millenium Great Depression. The government borrowed funds to give to the auto industry so Americans could keep their jobs and the economy could be jump started. The strategy worked in the short-term because the United States economy improved even though the Real Estate market crashed. Another advantage the deficit spending helps the United States to fight wars.

Crowing-out Effect

The Crowding-out effect happens when the United States government borrows funds from foreign companies to finance government spending. The end result can end with the government overspending and driving the interest rate upwards. It’s a proven fact that when our government borrows from another country, the American government raises the interest rate to increase the American demand for loans, which again pushes the prices upwards. Basically, Crowding-out effect could push the United States economy into a recession because the banks interest rate is so high that the consumer does not borrowing any funds.In a nutshell, increase government spending crowding out the private sector. The crowding out effect must be controlled and watchedvery closely.This chain reaction called the crowding out effect, can eventually lead to a situation where the federal government allocates less money to investments (Ingram, 2012).

Conclusions

The deficit spending using the Keynesian economics from the 1930 depression area is not effective for short or long term deficit spending. We live in technology era that has different implications that in the 1930s. Today, United States deficit is large for the Keynesian economics to work because the parameters and amount of deficit is different from the Great depression. However, the Crowding-out effect would be more prevalent and more economic for American. The reason the Crowing-out effect will work because the United States has loaned billions of dollars to foreign countries. It would make better economical sense to borrow those funds from other countries with high agricultural or other precious minerals that could benefit the American Economy. If we loaned Turkey 50 billion for their military and Turkey has natural resources such as oil, the United States can demand payments in full or in form of oil or gold.

References

Ingram, D.What are some disadvantages of the budget deficit? Retrieved from http://www.ehow.com/info_7759968_disadvantages-budget-deficit.html#ixzz2BO8Je9n4

Krugman, P. (2009).The conscience of a liberal. Retrieved from http://krugman.blogs.nytimes.com/2009/09/28/crowding-in/