Describe Deficit Spending Advantages - Research Paper
During the Great Recession, like any other economic downturns, as unemployment rises, aggregate income declines causing a major decline in tax collections. On the other hand, with the rise in unemployment, spending on safety net programs rise. So, there are not too many good options available to resort the health of the national economy. It will be very difficult to defend cuts in the federal government programs and especially the programs geared to sustain the minimum of the standard of living for the recent “poor.” So, government needs to increase its borrowing. Deficit spending refers to government spending exceeding what it brings in federal income and corporate taxes during a certain period. Deficit spending hence increases government debt. Most economists accept that deficit spending is desirable and necessary as part of countercyclical fiscal policy. In such a case, government increases its borrowing and hence its deficit to compensate for the shortfall in aggregate demand. This is derived from Keynesian economics, and has been the mainstream economics view. Following John Maynard Keynes, many economists recommend deficit spending to moderate or end a recession, especially a severe one. When the economy has high unemployment, an increase in government purchases creates a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. (This is the multiplier effect). This raises the real gross domestic product (GDP) and the level of employment and lowers the unemployment rate. Government borrowing under such circumstances increases the demand for borrowing and thus pushes interest rates up. Rising interest rates can "crowd out" (discourage) fixed private investment spending, canceling out some of the demand stimulus arising from the deficit Write an essay analyzing the advantages and disadvantages of deficit spending and the effects of federal government borrowing on the economy i.e., the “crowding out” effect. Your paper should be structured as follows 1. Cover page with a running head 2. Introduction: What is deficit spending and how does it work. 2.1. Advantages 2.2. Disadvantages 3. Crowding-out Effect 4. Conclusions: Do you believe that deficit spending helps or hinders short-term and long-term economic growth? 5. References
Deficit Spending
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Deficit Spending
Introduction
Deficit spending is a condition where individual, company or even a state do not have adequate financial resources to cater for their needs and development agendas and hence look for external sources to facilitate them. In the 21st century, deficit spending is common in many developing countries as they have limited resources compared to the huge fiscal projects they need to undertake. Large governments also engage in huge borrowing which makes the interests rates to rise. Internal and external borrowing, leasing of government properties, issuance of bonds in open market operations and selling privatization of government parastatals are among many sources of external funding CITATION Rai13 \l 1033 (Schultze & Dagmar, 2013). Deficit spending is a double sided sword as it has both advantages and disadvantages as discussed below in this article.
Advantages
Firstly, deficit spending leads to increased economic growth. Many governments in the world today engage in huge borrowing to finance their huge projects. These projects include construction of roads, railways, airports, equipping of hospitals and building of training institution CITATION Mar13 \l 1033 (Bull & Rhodes, 2013). These projects make the country grow economically because these projects create jobs for a large group of people in the society. When projects like hospitals and training institution and school are well-equipped, the population receive good and improved services which improve their standards of living. Most of the projects such as roads have indirect lasting benefits to the economy since they lead to establishment and growth of towns and facilitate better holistic economic growth. The people engaging in the respective infrastructural activities seek housing and other services such as banking, education and medical which are established along those areas. This helps in poverty eradication, good living standards, job creation and increased demands for goods and services.
Secondly, deficit spending leads to increased demand for goods and services because when government acquires these finances, they undertake projects like construction of roads, railways and ports demand of building materials rises. This leads to the establishment of industries which are involved in the manufacturing of building materials such as cement mining, wood production, and even quarrying. These industries create a lot of employment to many people and attracts other investors and service lenders to those regions. This leads to the establishment of schools, hospitals, housing, water and banking facilities. These industries also make the demand for others products such as food and clothes to increase. Large sales of these products also benefit the governments more because they raise a lot of revenue through tax charged on those commodities. The government also benefits by providing housing facilities to that population hence getting land rates and rents. The governments also charge a licensing fee to the industries established to manufacturing and production of commodities.
Thirdly, deficit spending has helped many nations to acquire good and standard infrastructures. The government borrows fund and builds infrastructures like roads and railways. Construction of roads and the railways has eased movement of goods and people across regions and countries. Communication has improved as a result of good transport systems and has improved the integration of people and peace has maneuvered in many parts of the parts of the world as a result of good transport and communication systems. Good transport has facilitated faster movement of goods enabling them to reach the market in time CITATION Rob14 \l 1033 (Skidelsky & Martin, 2014).
Lastly deficit spending increases the accountability of funds. This is facilitated because the funds borrowed are wisely monitored. This has helped to curb corruption cases because many institutions and also governments demand a lot of accountability of these funds. Wastage of resources is also minimized because the borrowed funds are mostly accompanied by huge in...