Micro Economics Essay, Research Paper

U.S. Budget 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.