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Deficit spending
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Deficit spending
Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit, the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual. A central point of controversy in economics, government deficit spending was first identified as a necessary economic tool by John Maynard Keynes in the wake of the Great Depression.
Government deficit spending is a central point of controversy in economics, with prominent economists holding differing views.
The mainstream economics position is that deficit spending is desirable and necessary as part of countercyclical fiscal policy, but that there should not be a structural deficit (i.e., permanent deficit): The government should run deficits during recessions to compensate for the shortfall in aggregate demand, but should run surpluses in boom times so that there is no net deficit over an economic cycle (i.e., only run cyclical deficits and not structural deficits). This is derived from Keynesian economics, and gained acceptance during the period between the Great Depression in the 1930s and post-WWII in the 1950s.[citation needed]
This position is attacked from both sides: Advocates of federal-level fiscal conservatism argue that deficit spending is always bad policy, while some post-Keynesian economists—particularly neo-chartalists or proponents of Modern Monetary Theory—argue that deficit spending is necessary for the issuance of new money, and not only for fiscal stimulus.[citation needed] According to most economists, during recessions, the government can stimulate the economy by intentionally running a deficit.
The deficit spending requested by John Maynard Keynes for overcoming crises is the monetary side of his economy theory. As investment equates to real saving, money assets that build up are equivalent to debt capacity. Therefore, the excess saving of money in time of crisis should correspond to increased levels of borrowing, as this generally doesn't happen - the result is intensification of the crisis, as revenues from which money could be saved decline while a higher level of debt is needed to compensate for the collapsing revenues. The state's deficit enables a correspondent buildup of money assets for the private sector and prevents the breakdown of the economy, preventing private money savings to be run down by private debt.
The monetary mechanism describing how revenue surpluses enforce corresponding expense surpluses, and how these in turn lead to economic breakdown was explained by Wolfgang Stützel much later by the means of his Balances Mechanics.
William Vickrey, awarded the 1996 Nobel Memorial Prize in Economic Sciences, identified deficits being viewed as profligate spending as his #1 fallacy of Financial Fundamentalism when he commented:
"This fallacy seems to stem from a false analogy to borrowing by individuals. Current reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees, and other charges. This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public investment takes place in infrastructure, education, research, and the like. Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity. Deficits in excess of a gap growing as a result of the maximum feasible growth in real output might indeed cause problems, but we are nowhere near that level. Even the analogy itself is faulty. If General Motors, AT&T, and individual households had been required to balance their budgets in the manner being applied to the Federal government, there would be no corporate bonds, no mortgages, no bank loans, and many fewer automobiles, telephones, and houses."
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Deficit spending
Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit, the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual. A central point of controversy in economics, government deficit spending was first identified as a necessary economic tool by John Maynard Keynes in the wake of the Great Depression.
Government deficit spending is a central point of controversy in economics, with prominent economists holding differing views.
The mainstream economics position is that deficit spending is desirable and necessary as part of countercyclical fiscal policy, but that there should not be a structural deficit (i.e., permanent deficit): The government should run deficits during recessions to compensate for the shortfall in aggregate demand, but should run surpluses in boom times so that there is no net deficit over an economic cycle (i.e., only run cyclical deficits and not structural deficits). This is derived from Keynesian economics, and gained acceptance during the period between the Great Depression in the 1930s and post-WWII in the 1950s.[citation needed]
This position is attacked from both sides: Advocates of federal-level fiscal conservatism argue that deficit spending is always bad policy, while some post-Keynesian economists—particularly neo-chartalists or proponents of Modern Monetary Theory—argue that deficit spending is necessary for the issuance of new money, and not only for fiscal stimulus.[citation needed] According to most economists, during recessions, the government can stimulate the economy by intentionally running a deficit.
The deficit spending requested by John Maynard Keynes for overcoming crises is the monetary side of his economy theory. As investment equates to real saving, money assets that build up are equivalent to debt capacity. Therefore, the excess saving of money in time of crisis should correspond to increased levels of borrowing, as this generally doesn't happen - the result is intensification of the crisis, as revenues from which money could be saved decline while a higher level of debt is needed to compensate for the collapsing revenues. The state's deficit enables a correspondent buildup of money assets for the private sector and prevents the breakdown of the economy, preventing private money savings to be run down by private debt.
The monetary mechanism describing how revenue surpluses enforce corresponding expense surpluses, and how these in turn lead to economic breakdown was explained by Wolfgang Stützel much later by the means of his Balances Mechanics.
William Vickrey, awarded the 1996 Nobel Memorial Prize in Economic Sciences, identified deficits being viewed as profligate spending as his #1 fallacy of Financial Fundamentalism when he commented:
"This fallacy seems to stem from a false analogy to borrowing by individuals. Current reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees, and other charges. This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public investment takes place in infrastructure, education, research, and the like. Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity. Deficits in excess of a gap growing as a result of the maximum feasible growth in real output might indeed cause problems, but we are nowhere near that level. Even the analogy itself is faulty. If General Motors, AT&T, and individual households had been required to balance their budgets in the manner being applied to the Federal government, there would be no corporate bonds, no mortgages, no bank loans, and many fewer automobiles, telephones, and houses."
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