Deficit Spending Short paper

8/9/2019 Deficit Spending Short paper

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Running head: DEFICIT SPENDING1

Deficit Spending

Edna Fenollal

American Public University System

29 June 20!

E"#$02

Prof% &eac'


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DEFICIT SPENDING 2

Deficit Spending

Discretionary fiscal policy is an intensely debated topic in government politics% ('en

t'e economy is )aning* s'ould t'e government spend more or ta+ less, Ultimately* t'e t)o 'ave

very similar effects on t'e economy* but per'aps t'e intended results are not as great as

politicians )ould 'ave t'e people believe% Discretionary fiscal policy 'as its disadvantages to

counteract t'ose intended advantages%

E+pand or "ontract

Discretionary fiscal policy allo)s for t'e government to increase spending )'en it is

appropriate for t'ose functions of t'e government t'at may not be mandatory% -enerally* suc'

policy is used )'en t'e economy is not operating at pea. performance* and discretionary policy

is intended to s'ift aggregate demand to t'e rig't or left depending on )'et'er an e+pansionary

or contractionary policy is needed /ittenberg 1 regart'an* 20!3%

A budget deficit )ill occur )'en t'e government is see.ing e+pansionary policies% 'e

idea 'ere is t'at t'e government is spending more money to compensate for flagging

development in t'e private sector% &y purc'asing additional amounts* and t'us spending more

money* t'e demand is artificially increased nation)ide* especially )it' t'e government being

suc' a large portion of t'e overall purc'ases in t'e nation% 4t all* 'opefully* sno)balls into a

5uic.er recovery for )'ic'ever problem currently plagues t'e nation and necessitated t'e

e+pansionist policy /ittenberg 1 regart'an* 20!3%

'e increase in spending by t'e government corresponds to increase in income for

businesses )'ic' in turn e5uates to an increase in consumption% &ecause of t'is* t'e increase in

government spending is not one for one% For every bit of increase in spending* some of it is


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DEFICIT SPENDING 3

absorbed by an increase in prices t'an.s to t'is increase in consumption% So )'ile t'e net effect

may be an increase in aggregate demand* it comes )it' a possible longer6term do)nside of

increased prices as t'e e5uilibrium level c'anges /ittenberg 1 regart'an* 20!3%

Anot'er form of deficit spending* t'oug' some)'at in reverse of strictly spending* is to

decrease business ta+ation% 'is is a part of contractionary fiscal policy% &y creating ta+ credits*

t'e government can also directly affect private sector investment% 4t also s'ifts t'e aggregate

demand curve to t'e rig't% 4t 'as similar advantages and disadvantages* in t'at demand )ill

increases* but so )ill prices% A similar result )ill 'appen if income ta+es are decreased* alt'oug'

t'e aggregate demand s'ifts again because of consumption and not necessarily due to increased

investment% -enerally* a decrease in income ta+es produces less of an effect t'an an increase in

government spending due to t'e multiplier effect /ittenberg 1 regart'an* 20!3%

#ne problem facing t'e government )it' any fiscal policy* deficit spending or ot'er)ise*

is t'at t'e economy )ill often 'ave lags in its s'ift% 7i.e ot'er monetary policy* it ta.es time to

recogni8e t'e problems* time to move t'e bureaucracy to c'ange t'e problems* and time for

t'ose c'anges to 'ave an impact recognition* implementation* and impact lag /ittenberg 1

regart'an* 20!3% 'erefore* it is often un)ise to e+pect t'e government to be able to ma.e an

impact on any problems t'at are current* since t'e c'anges )ill ta.e at least a year and probably

longer to ma.e a difference% 'is does not mean t'at t'ose actions s'ould not be ta.en* but t'at

)aiting for t'eir results or e+pecting immediate c'ange is un)ise%

Any e+pansionary or contractionary policy tends to re5uire t'at t'e government finds

more money* )'et'er t'ere is a current surplus or not% 'is is ultimately deficit spending and

re5uires additional sources of revenue* generally t'roug' t'e sale of bonds% An increase in bonds


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DEFICIT SPENDING 4

'as an increasing effect on t'e interest rate and a corresponding decrease in private investment%

4t also produces an increased demand for dollars and corresponding increase in t'e foreign

e+c'ange rate% 'is unfortunately reduces e+ports* an effect e+plicitly not )anted )'en in an

e+pansionist fiscal policy% 'is is t'e process of cro)ding out* )it' private investment

decreasing because of increased government spending /Sc'midt* 2023%

Again* as )it' any discretionary policy* t'e negative effects may not out)eig' t'e

positive% 4t is generally still better t'at t'e government intervenes in dire financial times t'an to

presumably let t'e system fi+ itself% &ut in general* t'e results )ill be less t'an mat'ematically

or t'eoretically ideal%

"onclusion

('ile deficit spending and e+pansionist policies may 'ave negative effects* t'ese effects

must be balanced against t'e potential advantages% Ultimately* because of 'o) comple+ t'e

economy is and 'o) muc' lag is in'erent in any fiscal policy* it is difficult to )eig' t'e true

value of any policy s'ift% 'eory )ill continue to play a large role in t'e c'oices of government

fiscal policy% As )ill* of course* political )ill* )it' t'e intense partisan beliefs in control of t'e

government purse strings%


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DEFICIT SPENDING 5

eferences

ittenberg* 7% 1 regart'an* % /20!3% Principles of Macroeconomics% Saylor Foundation%

etrieved from 'ttp::)))%saylor%org:site:te+tboo.s:Principles;20of

;20

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Deficit Spending Short paper