Macroeconomics concepts and principles

U.S. Deficit

To understand the concept of deficit spending, we must first understand the concept of money, and how money can mean more than one thing. We tend to think of money as an object that is generally accepted in a given country/culture for payment of debt, goods and services -- as a means of exchange or value of an account. That being said, there is a huge difference between the way the money supply (currency) and bank money work within the economy and the manner in which the government changes its theory on spending. In modern capitalism, commodity money (like gold and silver coins, etc.) was replaced by representative money, and modern day monetary systems are no longer tied to the value of gold or precious metals. Instead, the goal of monetary policy is to accommodate economic growth within political and social environments. For instance, in the United States, the Federal Reserve Act states that the Federal committee shall "promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates" (U.S. Mint, 2011).

For individuals, we typically must live within a budget. This budget is a monthly among that consists of the necessities of modern life: food, clothing, transportation, some entertainment, insurance, etc. Technically, or spending should not exceed the amount we take in per month unless we have another source of income, trust fund, savings, etc. In economics, though, large governments do not tend to operate on this scale, or with this level of responsibility or detail. Deficit spending, for instance, is the amount by which an organization exceeds their spending over a period of time and assumes that outstanding debt (including to foreign countries) will not be called due. One predominant school of thought says that deficit spending is desirable and necessary as part of modern fiscal policy because it compensates for aggregate demand and over a cycle, balances out (Keynesian economics). This was more the way the U.S. deficit worked from the Depression on (Hamilton, 2010).

The other side, fiscal conservatism, says that the government should legally be bound to always run a balanced budget, with any surplus used to pay any outstanding dept. In effect, though, the aggressive spending from the 1970s onward has pushed the deficit to over $15 trillion dollars, or over $4 billion per day since 2007, which averages out to almost $50 thousand in debt for each citizen of the United States (U.S. National Debt Clock, 2011).