Government Deficit Spending

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Deficit spending - Definition Like other institutions, governments operate on a budget -- or try to do so. When the expenditures of a government (its purchases of goods and services, plus its tranfers (grants) to individuals and corporations) are greater than its tax revenues, it creates a deficit in the government budget. When tax revenues exceed government purchases and transfer payments, the government has a budget surplus (as in the late 1990s in the United States). Following John Maynard Keynes, many economists recommend deficit spending in order to moderate or end a recession, especially a severe one. When the economy has high unemployment, an increase in government purchases create a market for business output, creating income and…show more content…
(In the United States, this is seen most clearly when Vietnam-war era deficits encouraged inflation.) This is especially true at low unemployment rates (say, below 4% unemployment in the U.S.). But government deficits are not the only cause of inflation: it can arise due to such supply-side shocks as the "oil crises" of the 1970s and inflation left over from the past (inflationary expectations and the price/wage spiral). There must also be enough money circulating in the system to allow inflation to persist. (Thus, inflation depends on monetary…show more content…
Just as with borrowing by individuals or businesses, it can be good or bad. If the government borrows (runs a deficit) to deal with a severe recession (or depression), to help self-defense, or is spent on public investment (in infrastructure, education, basic research, or public health), the vast majority of economists would agree that the deficit is bearable, beneficial, and even necessary. If, on the other hand, the deficit finances waste (pork-barrel projects), or current consumption, most would recommend tax hikes, targeted transfer cuts, and/or cuts in government purchases to balance the budget. The decision about whether the deficits are good or bad can only be made democratically by an informed public. However, this is rarely the case, because the public generally does not have an adequate economic education. The public is likely to listen to the bickering of politicos. For example, while the magnitude of defecit spending is often best measured as a proportion of GDP, those uneducated in economics pay attention to the absolute numbers of a government defecit (rather than taking it as a proportion of GDP). In order to fight this economic education deficit, groups such as The National Council on Economic Education have been
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