Tag Archives: government spending

Why Deficit Spending During Recessions is Good

Why do most economists believe that governments should run deficits during recession? Isn’t borrowing money bad?

There’s some truth to the idea that borrowing money is often a bad idea for individuals and families. But we all know there are exceptions. For one, when there’s an emergency, you might not have any choice. And, contrary to popular analogies, government finances are very different from those of families.

Government revenues (aka “taxes”) are closely related to families’ and companies’ incomes, but that’s about where the similarity ends. When people lose their jobs in a recession, governments collect less in taxes. When corporate profits decrease, governments collect less in taxes. And we’re talking about governments at all levels here, from local to state to federal.

So what do governments do when they’re receiving less revenue? Local and state governments essentially have to run balanced budgets by law, so they cut spending. And this hurts the economy even more, causing more unemployment, and leading to even less tax revenue. What’s worse, the effects of decreased government spending get multiplied as the reduced money flows around the macroeconomy.

To be fair, there are natural forces that do eventually help economies recover. Real wages may fall to the point where companies finally start hiring again, for example. Eventually economies do tend to right themselves. The key word here is “eventually”. Unfortunately, it can take a country’s economy a decade or more to “fix itself”. Look at the Great Depression, or Japan’s Lost Decade.

To help the economy recover faster, we need to make up for the decreased investment spending by firms and decreased consumer spending. For better or for worse, the only entity in a position to do that is the federal government, since unlike state and local governments it is able to borrow money fairly easily.

As a result, the best minds in economics say that running a federal deficit during recessions is a good idea. Doing so will help to pull the economy out of the recession faster, and will reduce its severity.

There are some caveats, though.

Most importantly, governments should not be running deficits during expansions. If anything, the federal government should be running surpluses during expansions in order to pay down the public debt. This helps to clean up the government balance sheets in preparation for the next recession. Unfortunately, U.S. governments have shown an inability to do this. With the exception of the late 1990s, when politicians have seen surpluses, they’ve seen the opportunity to buy votes with tax cuts. This sounds good to many voters, but it’s bad news for the economy.

Second, borrowing money even for good reasons has implications. For one, you have to pay interest on it, and that costs money down the road. This is another good reason to pay down the debt during expansions.

Third, someone has to be willing to lend you the money. So far, the interest rates that the U.S. has to pay for the money it is borrowing are still low, partly because most other countries are even worse shape than the U.S. But as public debt as a percentage of GDP continues to increase, the interest rates the U.S. government will have to pay are bound to eventually start to increase, and that can cause serious problems. See Greece, Spain, and Italy for more of that. At the end of the day, no government can continue to borrow more and more money at an increasing rate indefinitely.

So the bottom line is that deficit spending during recessions is a necessary evil. Economists don’t like governments having to borrow money, but in downturns, it’s for a good cause. But there’s always a trade-off, and there are limits to how much any government can and should borrow. Eventually we’re going to hit those, and at that point we’ll have run out of options.

What the Heck is Fiscal Policy, Anyway?

Newspapers, politicians, and economists talk a lot about fiscal policy. But we often forget that not everyone understands what “fiscal policy” is.

In a nutshell, fiscal policy is how much governments choose to tax and spend, and thus how much they choose to borrow or (theoretically) save.

During recessions, economies have what economists call “inadequate demand”, or, looked at another way, “excess capacity”. Too many people are out of work. Left alone, economies should eventually recover from recessions on their own, without any help from the government or anyone else. However, this can take years, as we’re currently seeing in the U.S. In the meantime, millions of people suffer.

One way to address this is for the government to spend more than it takes in. It can do this either by increasing spending, decreasing taxes, or both. This is called deficit spending. It’s also called fiscal stimulus. Increasing deficit spending always provides fiscal stimulus to the economy. And providing fiscal stimulus always requires increasing deficit spending (or decreasing any fiscal surplus, if you’re fortunate enough to have one).

The problem with fiscal stimulus, though, is that you have to borrow money to do it. Essentially the government has to force the country as a whole to spend more today by spending less in the future.

This actually can make sense if the country is in a recession, and most economists agree that governments should run deficits during recessions. The problem is that during economic expansions, governments need to either be paying down debt by running a government surplus, or at least not be running a deficit. That’s where governments seem to have a problem.

Of course, no government can continue to borrow more and more money at an increasing rate indefinitely. Eventually no one’s going to be willing to loan them any more money. Even before it gets to that point, though, the country is likely to see its costs of borrowing increase. Not to mention the fact that the country will have to pay interest on that debt until they manage to pay it off.

Where exactly public debt begins to be a huge problem is hard to pinpoint, and it depends on many different global economic factors. Right now, Japan’s public debt is over 230 percent of its GDP, and it’s still able to raise funds. On the other hand, Greece’s debt is around 170 percent of GDP, and it’s a fiscal basket case.

According to the U.S. Treasury, the U.S.’s public debt was $16.2 trillion as of 5 October 2012. Given our second quarter GDP of $15.6 trillion, that comes out to 104 percent of GDP.

Despite this, the consensus among economists is that we still can’t afford to decrease government spending in 2013. Most economists surveyed feel that we still need that fiscal stimulus to keep the economy from falling back into recession.

The Myth of U.S. Defense Spending (Not) Debunked

I’d heard before that the U.S. not only is number one in the world in defense spending, but that is “spends more than the X next countries combined”, where X could be 5, 10, or even 15 or more.

And I’d always brushed off such claims. I figured they were just exaggerations by anti-American pinko-commie wimps. Distorted data warped to make a point. Misinformation.

Let me say from the start that I’m ex-Navy, and I like defense spending. A country’s first responsibility is to protect its people, and protecting American interests around the globe costs money. Countries that don’t have enough military presence are less likely to have things their own way on the global stage.

And I honestly believe that a lot of the stuff that the U.S. military does in other regions is good and even noble. I like being able to support pro-democracy movements in other countries, and being able to stop genocide. I take that “Never Again” talk about the Holocaust seriously.

So when a Facebook meme about the U.S. spending more than the next X countries came around the other day, I decided to check it out.

And I was surprised at what I found.

It’s true. The U.S. did indeed spend more on defense in 2011 than the next X countries combined, where X turns out to be 16.

The U.S. spent $690 billion dollars on defense (read “war and war-related stuff”) in 2011. Number two on the list was China with $129 billion in spending. Adding numbers 2 through 17 together gives a total of $684 billion in spending.

The U.S.’s defense spending as a percentage of GDP had been decreasing from 1986 through 1999. We called it the peace dividend. It was supposed to be the benefit we got from “winning the Cold War”, as we used to say. Spending decreased from 5.8 percent of GDP in 1986 to just 2.8 percent of GDP.

Understandably, September 11 changed things. Part of defending the “Homeland” required an increase in defense spending. It would be nice if defense didn’t have to go further than a country’s borders, but unfortunately it doesn’t work like that.

And so defense spending has been increasing since 1999 and is now up to 4.6 percent of GDP.

But the question today is, now that the U.S. has eliminated Osama bin Laden, now that the War in Iraq is over, now that the Taliban weakened, do we really need to be spending so much on defense?

Again, I like defense. I like being able to throw our weight around on the global stage. And I love me some Abrams tanks (let’s be honest – they really are cool). But do we really need quite so many of them? Do we really need to be outspending the next 16 countries combined?

I don’t want America to be weak, and I don’t want to make the world unsafe for Americans.

But maybe – just maybe – if we spent a little less on guns and bullets and tanks and missiles, maybe a few other countries wouldn’t feel obligated to spend quite so much. And maybe – just maybe – we’d have have much security without having to spend so much on it.

Not to mention having more money on hand to do good stuff for Americans right here at home.

Most Economists Say Government Should Avoid Spending Cuts in 2013

As reported in the Wall Street Journal’s blog, most of the economics surveyed believe that the government should maintain or increase spending in 2013. Nearly half of them believe that the government should spend even more. Only 33 percent of the 236 economists advocated less fiscal stimulus.

This is because the economists believe that the economy remains sluggish, unemployment remains high, and stimulus is needed to promote economic growth, despite the already-high government debt levels.

What’s particularly interesting is reading the comments. Readers of the Wall Street Journal, of course, are mostly business people. And business people, for the most part, do not want to hear that fiscal stimulus is still needed to help revive the economy. They take issue with various aspects of the economists surveyed, all but personally attacking them unseen. Never mind that the economists surveyed are experts in their fields, spending all their time poring over economic models and data. If the experts say something that readers don’t want to hear, the experts obviously must be wrong.