Deficit Spending
What Is Deficit Spending?
In the least difficult terms, deficit spending is the point at which a government's expenditures surpass its revenues during a fiscal period, making it run a budget deficit. The phrase "deficit spending" frequently suggests a Keynesian approach to economic stimulus, wherein the government assumes debt while utilizing its spending power to encourage interest and invigorate the economy.
Understanding Deficit Spending
The concept of deficit spending as economic stimulus is commonly credited to the liberal British economist John Maynard Keynes. In his 1936 book The General Theory of Employment, Interest and Employment, Keynes contended that during a recession or depression, a decline in consumer spending could be balanced by an increase in government spending.
To Keynes, keeping up with aggregate demand — the sum of spending by consumers, organizations and the government — was key to keeping away from long periods of high unemployment that can demolish a recession or depression, making a descending spiral where debilitating demand makes organizations lay off even more workers, etc.
When the economy is developing once more and full employment is reached, Keynes said, the government's accumulated debt could be reimbursed. If extra government spending caused excessive inflation, Keynes contended, the government could just increase government rates and drain extra capital out of the economy.
Deficit Spending and the Multiplier Effect
Keynes accepted there was a secondary benefit of government spending, something known as the multiplier effect. This theory recommends that $1 of government spending could increase total economic output by more than $1. The thought is that when the $1 changes hands, in a manner of speaking, the party on the less than desirable end will then proceed to spend it, without any end in sight.
While widely accepted, deficit spending additionally has its faultfinders, especially among the conservative Chicago School of Economics.
Analysis of Deficit Spending
Numerous economists, especially conservative ones, can't help contradicting Keynes. Those from the Chicago School of Economics, who go against what they depict as government obstruction in the economy, contend that deficit spending will not affect consumers and investors since individuals realize that it is present moment — and at last should be offset with higher taxes and interest rates.
This view dates to nineteenth century British economist David Ricardo, who contended that since individuals realize the deficit spending must eventually be reimbursed through higher taxes, they will set aside their cash as opposed to spending it. This will deny the economy of the fuel that deficit spending is intended to make.
A few economists likewise say deficit spending, whenever left unrestrained, could undermine economic growth. Too much debt could make a government increase government rates or even default on its debt. Furthermore, the sale of government bonds could swarm out corporate and other private issuers, which could distort prices and interest rates in capital markets.
Modern Monetary Theory
Another school of economic idea called Modern Monetary Theory (MMT) has taken up fight for Keynesian deficit spending and is acquiring influence, especially on the left. Defenders of MMT contend that for however long inflation is contained, a country with its own currency doesn't have to worry about accumulating too much debt through deficit spending since it can constantly print more money to pay for it.
Highlights
- Deficit spending happens while government spending surpasses its revenue.
- British economist John Maynard Keynes is the most notable defender of deficit spending as a form of economic stimulus.
- Deficit spending frequently alludes to deliberate excess spending intended to animate the economy.
