Advantages And Disadvantages Of Deficit Spending

Deficit spending and the Crowding Out Effect
Deficit spending occurs when expenditures exceed an economies income or revenue from taxes. The concept is most associated with Governments however; it does apply to individuals also. This paper will analyze deficit spending, advantages, and disadvantages. In either case of advantage or disadvantage, deficit spending has multiple effects on economies and full of controversy. Hassan, M., Nassar, R., & Liu, C. identifies “The relationship between government deficit spending and the growth domestic product is of extreme importance for economic policy making, especially in times of economic downturns as has been experienced in the US and around the world in recent years” (Hassan, M., et al., pg. 103 2014). Other effects such as higher interest rates cause great concerns, concerns such as the Crowding out Effect. This paper will focus
Deficit spending during a recession can come to the aide of society through programs like welfare and unemployment. Deficit spending allows governments to work around other economic challenges like raising taxes to generate income. A raise in taxes cause the individuals have less disposable income. To put that into to perspective the US already has the highest statutory tax rate so raising it more has pro and cons as well. By increasing spending it can stimulate employment thus naturally increases the amount of consumer spending and in turn generate natural income. John Maynard Keynes identifies “Aggregate expenditure as being key to economic activity” (as cited in Petroffs macroeconomics). A good factual example of this was the increase of defense spending during World War II the U.S was able to recover from the Great Depression. A key point here is if firms know that the government is start purchasing certain items then they will start producing them thus Aggregate