Deficit and Economy Today Economists Generally Agree Essay

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  • Subject: Economics
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Excerpt from Essay :

Deficit and Economy

Today, economists generally agree that high budget deficits reduce the ability of the economy to grow in the future. So, the general question is, why do high budget deficits matter? In order to understand this, we need to understand the concepts of economic growth and decline. What is economic growth: "Economic growth occurs primarily with the increase in value of goods and services produced by an economy" (Case et. al, 2009) while growth measurement" happens through the computation of the percentage increase in inflation adjusted, real growth in Gross Domestic Product" (Case et. al, 2009). Furthermore, the GDP is "the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports" (Case et. al, 2009). Therefore, we can define an economic slowdown in opposite terms, meaning, goods and services produced decline, inflation becomes a product, and the GDP thus slows down. So, how do high budget deficits interact with the economic downturn? Periods of economic growth and prosperity are generally defined by the amount of money present and available in a given economy. Therefore, when the deficit is high, less money is available to the public, and this can create real problems. If there is less money circulating in individual industries, the economic situation can take a downward spiral, because the money simply isn't there for individuals to spend on goods and services to stimulate the economy further. This concept is illustrated in President Obama's initial plan to increase economic growth, which actually increased the deficit, but provided more money to the economy through circulation and various government programs. While the effort to place more money in circulation is certainly commendable, the fact that the program also increased the deficit means that in the long run, it cannot and will not solve the problem of less money in circulation. Therefore, this concept helps to demonstrate that the federal government's high national deficit does much to decrease money available in the economy, thus causing economic downturn and affecting various aspects like employment, credit, and the stock market.

The problem of the massive deficit spirals downwards onto individuals in all aspects and classes of society. With less money available, there are generally then less jobs available, since managers lack the funds and abilities to pay employees. This factor then creates a further downward spiral, because without jobs fewer people are able to afford different goods and services, and then even less money winds up in circulation. The more money we burrow as a nation, the less money we are actually able to implement into circulation and this only further devastates the economy.

However, one question remains; if we are burrowing more money, why is it not thus present in our economy? Where is it going? Shouldn't it be circulating somewhere in our country? The answer is no; it is not circulating in our country. If we take a close look at George Bush's 2008 and 2009 budget plans, we can see why. An enormous amount of spending went to fund the Iraq War, and the continuous presence of troops in Afghanistan is also a huge war time expense. As most wars generally are to state budgets (a clear example that comes to mind is Loius XVI's participation in the American Revolution which eventually destroyed the French Budget and the monarchy), the Iraqi War has been a huge cause of the high deficit, and thus former President Bush has received increasing amounts of criticism for his spending due to the economic downturn (much like Louis XVI did).

While we are not currently seeing the political instability and economic crisis in an angry, bloodthirsty way as it was presented during the French Revolution, the general panic and decay of society in both circumstances is an important factor of comparison. For instance, Louis XVI's large national deficit meant that he did not have the ability to provide funds for work programs, to charities, and to other causes that may otherwise have helped to alleviate the situation. It also meant that individuals continued to lose work and starve, because less and less money was in circulation. France had borrowed the money only to invest it in the American War, not to invest it in its own country's economy. Basically, America, with the Iraqi War, has done the same thing, and therefore done much to create its own financial problems. This burrowed money is gone now; it is not in circulation in the company and because the national debt is so large, there is less and less money in circulation and the situation continues to decay. As a result, we have seen an increasingly high unemployment rate and less government money to assist the poor. In California, for instance, the economic situation has gotten so bad that the government has little money to assist the unemployed (Understanding the WTO, n.d.). The unemployed can now only collect for about a year, at which point, job or not, they are now cut off. We can only imagine how that would increase panic among individuals frightened about their current job situations.

Furthermore, what generally happens when there is less money in existence, is that more money is printed. This, however, never really solves the problem and in fact causes inflation. The American dollar has been considered weaker worldwide than it ever has before, possibly since the Great Depression, and this is a result of inflation. What, exactly, is inflation?

Inflation is calculated by the growth rate in price levels measured as weighted averages of prices of a variety of goods and services. In the United States the Gross Domestic Product Deflator (GDPD) measures the price level for all goods and services, as well as factory equipment and other goods acquired by businesses, luxury goods, and goods purchased by the government. A further index, the Consumer Price Index (CPI), calculates the price level for goods and aservices which are related with the basic cost of living, which includes food, gasoline, utilities, housing, and clothes. (Bureau of Labor Statistics, n.d., para 23)

Inflation only creates increasing problems for individuals. This is because inflation generally makes the money, in such a short supply, worth even less. It now costs several more dollars, for instance, to purchase a gallon of milk than it did two years ago. This is certainly a result of inflation, and is just another example of how the deficit has affected the economy. The general trend to print more money in order to put more money into circulation is usually a response of the government to an increased deficit or other financial problem in the economy. Generally, printing more money has never been anything other than a short-term solution which then creates more long-term problems for individuals, especially those on a fixed income.

Individuals generally expect a certain amount of money every year based on their work, and become accustomed to getting a certain amount of items or services for the money they make. In a time of economic slowdown and inflation, money is worth less, and it costs much more to purchase items. This only makes individuals increasingly less interested in spending money, as items costs more, and creates further strains on the economy.

Furthermore, the crisis of the national deficit has also affected corporate and organizational reactions, creating scares in the stock market which only further affect the economy overall (CNBC, 2010). The stock market is often a huge indicator of whether or not the economy itself is healthy, and many corporations are government funded, rely on government grants and money, or have some kind of relationship with the government. These types of organizations are generally also competitors on the stock market. Therefore, when there is a general scare, like the previous scare of the possible government shut down, people often react by pulling out of the stock market and thus causing it to fall, because they are frightened of losing even more money in the stock market (Shuster & Peterson, 2009). This only further affects the downturn in the economy, again meaning there is now less money available and the general feeling of panic. The huge national deficit has basically become America's albatross, hanging on everybody's necks like a huge weight pulling everybody down into the abyss of debt.

Mentioning debt, another general reaction to high government spending is the inability for the individual or small business to get financial funding and loans when necessary. For some individuals, this is totally devastating; for example, they may need a car to get to work and may not be awarded the loan necessary to buy the car in the first place. So, they may have to lose or give up their jobs. For small businesses, this is also devastating. Often times small businesses will need loans to purchase products and then are paid back as those products sell. Advertising is also generally…

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