Econ 102 - Deficit Spending

Damarious Farley

ECON102

Professor John Theodore

7/2/17

Deficit Spending

Deficit spending is a term you may hear on a regular basis when watching or listening to news stations. I learned about deficit spending and found that our government is basically spending more than it is making. Deficit spending occurs when the government creates a debt balance. Fiscal and trade deficits are caused by deficit spending and fiscal deficits occur when expenditures exceed the revenue. When the government borrows money to fill the gap or fund the deficit the debt becomes larger which is what has happened with the US government.

There are advantages and disadvantages to deficit spending. The most important advantage of deficit spending is to help pull a country out of a recession. There are many other factors that contribute or show the advantages of deficit spending like economic growth, control on government spending, and protection if government is forced to war. Deficit spending can create employment in the labor force and will encourage more jobs and increase revenue, which will attract more investors. The advantages are some that are very important in making the economy grow and are ways to ensure our country can take of itself in the case of an emergency. There are many advantages to deficit spending however there are some disadvantages as well.

The disadvantages are some that our country is seeing through the looking glass, unfortunately. Deficit spending can reduce investments because the government cannot manage their loan and the debt continues to pile up. When the government is weak and needs a loan from another country it gives the lending country an upper hand where they will have certain demands before approving the loan. During a deficit period a country will usually have no savings so it is important for the government to prioritize paying off the debt and interest so that when there is an emergency the country will not have to worry about how the emergency will be taken care of. If there is an emergency and there is no saving the government will be forced to borrow from another country. With all of this a major issue that working people face if the hike up of taxes, the reduction of public services, in crease in price of commodities which will lower the standard of living. Deficit spending on a more common scale I think about your own financial situation. If a person works and makes $60,000 a year but runs up credit card debt and borrows money through a loan department that is way more than the person can make payments on there is no way to get out of the debt. The person may be able to make enough to continue borrowing but will stay at a flat line across time instead of coming up in life.

The crowding out effect is a term that describes the governments’ borrowing that pushes up the interests’ rates for other individuals or small companies to even try to obtain a loan. The total supply of savings is for the entire nation so if the government uses the majority of it then the people of the nation do not have the money to borrow because of the high interest rates. Crowding out leads to a decrease in private sector consumption, which causes economic growth to slow down.

I believe that deficit spending helps with short-term economic growth because it can help pull a country out of a recession. As we can see with our government, a long-term economic growth with deficit spending is not a positive picture. During 2009 the deficit hit a record high of $1.4 trillion, which was due to both deficit spending of the financial crisis. As for the fiscal year 2018, the deficit is $440 billion. Therefore, the deficit has decreased largely in about 9 years.