Essay on Effects of Long-Term Deficit Spending

1702 Words Dec 21st, 2011 7 Pages
The Effects of Long-term Deficit Spending

ECO 203 Prof. Kristian Morales October 3, 2011

The Effects of Long-term Deficit Spending

In times of hardship, economist Maynard Keynes noted that the federal government not only has a responsibility to help revive the economy, but is often the only solution when a recession grows deep enough. He argued that the basic problem of a severe recession is a lack of investment on the part of business despite low interest rates. The answer when neither business nor consumers are able to awaken the economy is that the government needs to step in and encourage investment through borrowing and spending. Government spending can reactivate a dull economy and spur on new investment and growth.
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Permanent structural deficits are future government liabilities, essentially bills that will come due sometime in the future. These liabilities are more of an issue because unlike cash-flow liabilities that are caused by discretionary spending, these debts are not discretionary; they have already been incurred. These entitlement program debts are “pay-as-you-go” programs, where benefits due from the past are paid from the current year’s taxes. This means that social security taxes collected from current workers are paying current retirees (Slivinski, 2010). There is currently a large gap between the taxes collected for these programs and the amount paid, which is an unfunded liability. The total unfunded liabilities of the federal government are in estimated at more than $75 trillion, far higher than the current federal debt of $13 trillion (Kotlikoff, 2011). To pay for this liability, this debt, the government must borrow in increasing amounts. Compounding this issue is that as changes in the demographic move the ratio of retirees versus workers higher, this deficit will increase dramatically. The government uses both fiscal and monetary policy to stabilize the economy and to correct downturns. The goals of fiscal and monetary policy are to sustain economic growth, reduce the effects of economic fluctuation, and maintain low unemployment. Monetary policy is often focused on

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