Essay on Best and Worst of Spending

2133 Words Jul 1st, 2012 9 Pages
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The Best and Worst of Spending Barbara Cook-Snider ECO203: Principles of Macroeconomics Instructor: Marlo Chavarria February 20, 2012 The Best and Worst of Spending I am writing a paper in response to my class, Principles of Macroeconomics, in which we are to speak about the government deficit and what our thoughts are based on research. It’s easy to speak of what and why our deficit is so high, but there are many different opinions of how to fix it. Maybe there

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That is not, of course, "Plan A." Everyone would have been much happier if the economy had continued to expand, which would have made stimulative deficit spending unnecessary. We also would have liked it better if monetary policy (lower interest rates) could have reversed the economy's slide, but rates are already as low as they can go. The last resort was to try to expand the economy directly, which is what the stimulus package from this past Spring was all about.
The increase in the deficit in the face of the weakening economy is, in fact, one of the reasons that focusing on the "cash-flow deficit" can be so misleading. It is one thing to say that we are running a deficit of, say, 12% of national income during boom times, but it is quite another to say we are running a deficit of that magnitude during a recession. During a recession, we should expect that the deficit will be temporarily high, for two reasons:
First, when the economy is weak, we collect fewer tax dollars (because so many people have lost their jobs or have seen their incomes fall), and we also have to spend more money on benefits to prevent people from suffering catastrophic and irreversible harm as they try to find new jobs.

The Best and Worst of Spending
Second, the deficit is also higher during a downturn than it would normally be because of the government's attempts to stimulate the economy.
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