Deficit spending is usual for the United States government. When taxes are not enough to meet the requirements stated in the federal budget, the difference is covered by borrowed funds. It means that the government works in the deficit. However, deficit spending is not a sound practice because it often involves borrowing of funds, and huge debts can be generated in short periods of time. Government tries to control deficit spending by focusing on services and operations that are thought to be necessary to citizens, meanwhile reducing funding of less essential services and operations. Government borrowing cannot increase faster than national income. The government may need additional funds, which may be borrowed from foreign countries to support deficit spending (Moss, 2014). That is why budget deficit needs to be financed either by increasing the debt or monetary emission, which leads to inflation. Nevertheless, most of the governments regularly deal with the budget deficit. More so, this situation is considered as normal and even desired because a part of the private sector tries to keep an active balance to accumulate financial claims. It is possible only when the government collects relevant monetary liabilities. A balanced size of the deficit is reliant on savings and financial politics of the private sector.
A temporary increase in economic growth rate can be noted as one of the advantages of deficit spending. “Each large deficit was followed by a period of budget surpluses or very small deficits” (Thornton, 2012, p.447). It means that deficit may have a positive influence on the economic system of a country. Economic growth brings new infrastructure, which may require labor force and stimulate jobs. The biggest effect from deficit spending can be seen during a period of the recession because the number of unemployed people is reduced and overall GDP is increased. Deficit spending is acknowledged as a necessary policy to control the economic state in the country. Since deficit spending has been practiced for years, expenses on covering the debt are hard to notice (Koo, 2014). Sometimes economy may be stimulated by the government with the use of deficit spending.
There are numerous disadvantages of deficit spending. First of all, it hinders the economy in the long run. Amounts of the United States obligations are truly worrying, and methods of fighting with the debt are currently limited. Even changes in taxation will not lead to improvement in the situation. Bardes, Shelley, and Schmidt (2013) state that “individuals and corporations facing high tax rates will adjust their earning and spending behavior to reduce their taxes” (p. 470). It means that tax policies are not an effective instrument of fighting with deficit spending as expected because their loopholes can be heavily abused. The debt is so enormous that financial system is almost on the edge and needs to be saved (Kregel, 2011). Politicians have different views on this subject. Mann and Ornstein (2013) note that “in recent decades, the Democrats have been more attentive to the need to reduce deficits, while the Republicans have made tax cuts their highest priority” (p. 123). This demonstrates a conflict of interest among the political parties in the United States, a problem that is hard to fix.
The crowding-out effect is an economic term referring to government spending that drives down private sector spending. The crowding-out effect is a tendency of reduction in private investments because of high-interest rates as a result of the expansionary fiscal policy. The crowding-out effect is important when the relative effectiveness of stimulative fiscal policy is determined by the size of the stimulative effect from the increase in money supply and reduction of interest rates on investment dynamics and export. The stimulative fiscal policy is relatively not effective in the case of low sensitivity of investments and export to the dynamics of interest rates. The crowding-out effect suggests that private investments are reduced because of increase in interest rates. The increase in investment demand may partially or fully eliminate the crowding-out effect. While increasing spending, the government tries to finance the budget deficit. The growth of demand for money on the market leads to an increase in interest rates, which will inevitably reduce the demand for investments in the real sector of the economy.
In conclusion, deficit spending helps with short-term economic growth; however it hinders economic development in the long run. The current economy is in a good state, but few essential aspects cannot be overlooked. Costs of interest rates on the U.S. obligations will increase with even more deficit spending, and it may cause a huge crisis (Bardes et al., 2013). The real problem is that the United States debt grows exponentially, which is not a good sign and is a disaster waiting to happen. While the government controls the situation, it is pretty tense, and politicians should be very careful with their decision making. The United States government should be looking for new directions in the economy to find new solutions to this problem.
Bardes, B., Shelley, M., & Schmidt, S. (2013). American Government and Politics Today: Essentials 2013 – 2014 Edition. Boston, Mass.: Cengage Learning.
Koo, R. (2014). The escape from balance sheet recession and the QE trap. Hoboken: Wiley.
Kregel, J. (2011). Resolving the U.S. financial crisis: politics dominates economics in the New Political Economy. PSL Quarterly Review, 64(256), 23-37.
Mann, T. E., & Ornstein, N. J. (2013). It’s Even Worse Than It Looks: How the American Constitutional System Collided With the New Politics of Extremism. New York, N.Y.: Basic Books.
Moss, D. (2014). A concise guide to macroeconomics (2nd ed.). Boston, Mass.: Harvard Business School Press.
Thornton, D. (2012). The U.S. deficit/debt problem: a longer-run perspective. Federal Reserve Bank of St.Louis Review, 94(6), 441-445.