During the Great Recession, like any other economic downturn, 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 can be 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.” In this case, government would need 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 may be acceptable 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 a part of much contemporary economic thinking. The thinking goes as follows: 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. The theory sounds good, BUT, 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. It may also encourage private saving (at the higher interest rates) thus reducing consumer spending.
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 papermustbe structured as follows Percent of paper grade
1. Cover page with a running head . . . . . 10%
2. Introduction: What is deficit spending and how does it work. . 40%
3. Advantages of deficit spending . . . . . 20%
4. Disadvantages of deficit spending . . . . 20%
5. Define and discuss the crowding-out effect . . . 20%
6. Conclusion: Discuss whether you believe that deficit spending 20%
helps or hinders short-term and long-term economic growth.
7. References (minimum of three) . . . . . 10%
