Deficit spending: Difference between revisions

Revision as of 20:30, 2 September 2005

Revision as of 14:45, 25 September 2005

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'''Deficit spending''' is the amount by which a government, private company, or individual's spending exceeds income over a particular period of time, also called simply "deficit," or "budget deficit," the opposite of [[budget surplus]].

Even though households and companies often engage in '''deficit spending''', it is typically only when the government does so that it sparks a controversy. Like other institutions, [[government]]s operate on a [[budget]] -- or try to do so. When the [[expenditure]]s of a government (its purchases of goods and services, plus its tranfers (grants) to individuals and corporations) are greater than its tax [[revenue]]s, 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 [[economist]]s 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 encouraging increases in consumer spending, which creates further increases in the demand for business output. (This is the [[Multiplier (economics)| multiplier effect]]). This raises the real [[gross domestic product]] (GDP) and the employment of labor, all else constant lowering the unemployment rate. (The connection between demand for GDP and unemployment is called [[Okun's Law]].) Cutting personal taxes and/or raising transfer payments can have similar expansionary effects, though most economists would say that such policies have weaker effects on aggregate demand. On the other hand, if supply-side (non-Keynesian) effects are brought into consideration, which method has a better stimulative economic effect is a matter of debate.

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Most economists favor the use of automatic stabilization over active or discretionary use of deficits to fight mild recessions (or surpluses to fight inflation). Active policy-making takes too long for politicians to institute and too long to affect the economy. Often, the medicine ends up affecting the economy only after its disease has been cured, leaving the economy with side-effects such as inflation. For example, President John F. Kennedy proposed tax cuts in response to the high unemployment of 1960, but these were instituted only in 1964 and impacted the economy only in 1965 or 1966 and encouraged inflation then, reinforcing the effect of Vietnam war spending. The vast majority of economists are now in favor of [[monetary policy]] to replace active use of deficits or surpluses.

Deficit spending :The amount by which a government, company, or individual's spending exceeds its income over a particular period of time. also called deficit or called budget deficit. opposite of budget surplus.