Deficit Spending

Spending financed not by current tax receipts, but by borrowing or
drawing upon past tax reserves. , Is it a good idea? Why does the U.S. run a
deficit? Since 1980 the deficit has grown enormously. Some say its a bad thing,
and predict impending doom, others say it is a safe and stable necessity to
maintain a healthy economy.

When the U.S. government came into existence and for about a 150 years
thereafter the government managed to keep a balanced budget. The only times a
budget deficit existed during these first 150 years were in times of war or
other catastrophic events. The Government, for instance, generated deficits
during the War of 1812, the recession of 1837, the Civil War, the depression of
the 1890s, and World War I.However, as soon as the war ended the deficit
would be eliminated and the economy which was much larger than the amounted debt
would quickly absorb it. The last time the budget ran a surplus was in 1969
during Nixon’s presidency. Budget deficits have grown larger and more frequent
in the last half-century. In the 1980s they soared to record levels. The
Government cut income tax rates, greatly increased defense spending, and didn’t
cut domestic spending enough to make up the difference. Also, the deep recession
of the early 1980s reduced revenues, raising the deficit and forcing the
Government to spend much more on paying interest for the national debt at a time
when interest rates were high. As a result, the national debt grew in size after
1980. It grew from $709 billion to $3.6 trillion in 1990, only one decade later.

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Increase of National Debt Since 1980
12/31/1980$930,210,000,000.00 *
12/31/1981$1,028,729,000,000.00 *
12/31/1982$1,197,073,000,000.00 *
12/31/1983$1,410,702,000,000.00 *
12/31/1984$1,662,966,000,000.00 *
* Rounded to Millions
Federal spending has grown over the years, especially starting in the
1930s in actual dollars and in proportion to the economy (Gross Domestic Product,
or GDP).

Beginning with the “New Deal” in the 1930s, the Federal Government came
to play a much larger role in American life. President Franklin D. Roosevelt
sought to use the full powers of his office to end the Great Depression. He and
Congress greatly expanded Federal programs. Federal spending, which totaled less
than $4 billion in 1931, went up to nearly $7 billion in 1934 and to over $8
billion in 1936. Then, U.S. entry into World War II sent annual Federal spending
soaring to over $91 billion by 1944. Thus began the ever increasing debt of the
United States.

What if the debt is not increasing as fast as we think it is? The dollar
amount of the debt may increase but often times so does the amount of money or
GDP to pay for the debt. This brings up the idea that the deficit could be run
without cost.

How could a deficit increase productivity without any cost? The idea of
having a balanced budget is challenged by the ideas of Keynesian Economics.

Keynesian economics is an economic model that predicts in times of low demand
and high unemployment a deficit will not cost anything. Instead a deficit
would allow more people to work, increasing productivity. A deficit does this
because it is invested into the economy by government. For example if the
government spends deficit money on new highways, trucking will benefit and more
jobs will be produced. When an economic system is in recession all of its
resources are not being used. For example if the government did not build
highways we could not ship goods and there would be less demand for them. The
supply remains low even though we have the ability to produce more because we
cannot ship them. This non-productivity comes at a cost to the whole economic
system. If deficit spending eliminates non-productivity then its direct monetary
cost will be offset if not surpassed by increased productivity. For example in
the 1980’s when the huge deficits were adding up the actual additions to the
public capital or increased productivity were often as big, or bigger than the
deficit. This means as long as the government spends the money it gains from a
deficit on assets


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