Deficit: Friend Or Foe Essay, Research Paper

Deficit: Friend or Foe

In the essay ?Why is the Deficit a God Send and Five Other Economic Heresies? by Walter Russell Mead he discusses the concepts of national debt and budget deficit. Both the debt and the deficit have some positive and negative consequences. The deficit can play a positive role in an economy in economic growth.

To fully support my argument that the deficit is good for countries such as the United States and Canada I would like to make the following points. The debt is the sum of the deficits that are owed to the banks that have lent the money to the country. A budget deficit occurs when the countries balance of expenditures minus the income it receives is equal to a negative number this causes the country to have a debt to other countries (Parkin 611). In most countries a balanced budget is not efficient additional funding is necessary to support all of the programs in place.

A country can survive living in debt because unlike private citizens the governments of both Canada and the United States rarely have to pay back their debts to other countries. If a person takes out a loan for any reason they have a set date when the loan has to be repaid. The lenders are more flexible for governments when the borrowing period has expired they can rollover the loans. This extension of the loan enables the governments to survive by only paying the interest on the loan with out ever scratching the surface of the principle.

The deficit is positive for growing countries even though it means going deeper into debt. The misconception people have about the deficit is when they try to relate their personal finances to that of the country. When small Businesses borrow money they have to eventually repay it so it would be crazy to spend more in a year then you make. A deficit in the budget of a household or small company does not work is because you are not economically growing at a rate in which you can support the growing annual increases in interest as you borrow more money. Small companies cannot sink lower and lower in to debt because the increase in interest is not met with economic growth, when this occurs banks will not invest. In the case of Canada and The United States the income is growing at a rate which slightly balances the increasing interest payments. The reason a government would never collapse from debt is that the people who lend the money prosper on the interest and it is in their best interest if the loans are not paid back immediately. In The United States ?during the Reagan and Bush administrations, as the budget deficit rose to nearly 300 billion, the annual rate of inflation fell from 13.5 percent (in 1980) to 2.9 percent (in 1992)? (mead 172). This decrease in inflation is good for the average person since the prices of goods are increasing at a rate close to the rate at which wages are increasing. The deficit is necessary since there are a large of expenses such as schools, roadways, repairs, etc., because of this the debt is a losing battle. A successful business, on the other hand, can use investments and obtain proportional return. Another good thing is that generally with a rise in the deficit comes a decrease in interest allowing even more money into the hands of the population. ?Historically much more damage has come from efforts to pay down the national debt?? an attempt by Roosevelt ??gave the depression a second wind?? (mead 172).

Countries such as Canada and the United States have come to rely on the deficit to be able to function on what the country makes. The deficit is definitely a benefit to both countries at the moment since the deficit is relatively small in comparison with the gross domestic product (mead 173). If the budget deficit is used sensibly it will continue to spark economic growth in Canada and the United States.

1. Mead, Walter Russell. ?Why the deficit is a God Send.? Intersections: Essays in the Sciences and Humanities. Scarborough, Ontario: Prentice-Hall Canada Inc, 1999.

2. Parkin, Micheal, and Robin Bade. Macroeconomics Canada in the Global Environment. New York: Addison-Wesley Publishers Limited, 1997 ed.