Eco 203: Principles of Macroeconomics

Topics: United States public debt, Monetary policy, Federal Reserve System Pages: 5 (1671 words) Published: April 15, 2013
The Budget Deficit
The further growth of the budget deficit has been caused by a weak economy and increased government spending in areas such as: health care, education, defense spending, and lowered taxes. The government and/or Federal Reserve Bank can often hurt the economy trying to balance out high budget deficits. There is no doubt that our national debt is increasing. Budget deficits today will reduce the growth rate of the economy in the future, proving where we invest our money matters. Fiscal and monetary policies also play a role in managing budget deficits. High budget deficits will certainly affect the overall economic growth and the debt that the U.S. has to struggle with. High budget deficits today will reduce the growth rate of the economy. Economic growth is defined in the text, Principles of Macroeconomics, as “an increase in the total output of an economy. It occurs when a society acquires new resources or when it learns to produce more using existing resources” (Case, Fair & Oster, 2009, Pg. 422). It is assumed that future generations will be better off than we are now and that the economy will grow due to technological advances. However, technological growth has been slowing. “Global growth is slowing – especially in advanced-technology economies”. Future generations might be left with a debt they may not be able to pay off. This may leave the Federal Reserve Bank (Fed) to make drastic increases in interest rates and/or taxes. High budget deficits today can make it harder for future generations to prosper as it deprecates the value of the dollar and increases bill/fines. If new resources are not found, the debt can only increase with inflated prices that perpetually make it harder and harder for future generations. It can be argued that the reasons we have such a high budget deficit don’t matter, but they do. “National debt would not exist if it did not have a benefit side” (Byrns, 2008). If the deficit is furthered by selling our national parks to China, for example, could buy us an ally. However, it means a higher debt and possibly the Chinese taking over there newly acquired land. It is not going to help our economy as much as investing in our education. How the nation budget is spent can ultimately reduce the deficit and strengthen our economy, or it can make things worse. “Some critics of national debt policies argue that if the government can issue unlimited debt, it will continually overspend. These critics argue that Congress often mistreats the ability to issue debt and is unwilling to exercise fiscal restraint. Persistent increases in both government debt and spending tend to support their line of argument. It may be easier to increase the national debt (and the debt ceiling) than to say no to projects supported by powerful special-interest groups” (Byrns, 2008). Knowing what has caused the deficit can prevent future mistakes, but important details on the reasons why we have such a high budget deficit are seemingly under appreciated. Focusing on what would create economic growth in the long run rather than the quick fix solution can help to reduce debt by increasing tax revenues while cutting spending on things such as unemployment benefits. If the money is being spent to create jobs, heath care, or education it may enhance future growth. However, if the money is spent defensively it can simply increase the debt while trying to cover up the problem. Budget deficits affect the general long-term economic growth and the debt of the United States. “Substantial deficits projected far into the future can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad” (Thoma, 2012). Fiscal account inequities could easily cause a loss of confidence among participating foreign exchange markets and international credit markets, as participants in those markets become concerned by the increasing budget deficits. The United States current and ongoing...
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