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In the 21st century, globalized economy has been significantly changed due to large debts of political leaders, such as the USA. It is known that the USA is facing economic crisis due to high overspending. Before talking about the influence of American deficit spending, it is highly recommended to define this term. According to the definition, deficit spending is the growth of government’s expenses over its revenues, causing or deepening a deficit (Lawrence, 2011). Foreign governments should finance this excess through borrowings. In the business world, economists define deficit spending as spending that decreases a surplus. Moreover, deficit spending is a spending, regarding which expenses are higher than revenues and imports exceed exports. It is known that deficit spending can lead to fiscal deficits (a situation when a government spends more money comparing to its revenues) and trade deficits (a situation when country’s import exceeds its export). Undoubtedly, deficit spending can have a positive impact on the country’s economy due to a big flow of money. On the contrary, if the country is not able to pay its debt it may have adverse effects that can lead to the growth of interest rates. Undoubtedly, it is vital for the government to know where to disburse money. Unfortunately, inability of American government to analyze current political and economic situation terribly influenced the development of this country that caused economic crisis and crowding effect. This paper will analyze pros and cons of deficit spending with paying attention to the crowding effect as a variable of economic crisis.
Advantages of Deficit Spending
Doubtless, if the government knows how to spend money in the right way, deficit spending can have many advantages. Firstly, the government may follow a debt policy in case of buying infrastructure, goods consumption, and restructurization, since it will bring many positive things for the future generations. Moreover, incurring of debts can lead to the growth of productivity since money flow for production will be increased. Undoubtedly, spending on any reconstruction of bridges and roads demonstrates positive side of deficit spending since it motivates people to work more. Secondly, the government may use substantial spending in case of doing investigative work, such as search for cancer or AIDS cure. The discovery of treatment for these serious diseases will definitely influence many generations positively. The results of scientific work will be shared as well as the costs in the future. It is clear if the government runs the deficit budget, it will bring the possibility to share the costs among many generations equally. Consequently, the above-mentioned example shows that deficit spending is effective and fair. Finally, another advantage of deficit spending is stabilization of economy. It can be explained by the fact that a country’s economic activity can be different form GDP. As a result, the aggregate expenditures determine the level of production. Transformations of fiscal policy considerably influence taxes and consumption. Thus, it is clear that deficit spending can improve country’s economic situation (Harvey, 2012).
Disadvantages of Deficit Spending
It is clear when the government uses deficit spending for stabilizing some economic issues. It can demonstrate improper planning or governmental mismanagement. Deficit spending is a debt because the government is unable to get enough money from taxes. Also, some scholars claim that deficit spending considerably influences employment rate since people are afraid of future repayments (Mulligan, 2012). Moreover, deficit spending can lead to impossibility of a person or organization to cover emergency situations, since a spender spends more than he/she earns. Additionally, it is known that deficit spending considerably worsens the economy of different businesses since the lenders do not trust such organizations. Also, at the governmental level, citizens are also worried about consequences of deficit spending since they are the most disadvantaged group who is responsible for additional costs payment. Finally, deficit spending can be an obstacle in investment opportunities since it may prevent a person to invest money into an apartment due to inability to save enough money for a down payment (Weisenthal, 2012).
The crowding-out effect is an important economic measure, which illustrates how growth in the public sector spending can change or decrease the private sector spending. Crowding-out is a situation, in which the government has to pay for its spending from the tax money, therefore, the money available for businesses shrinks and a crowding-out effect is created. The existence of crowding-out effect is in part because of financing the projects with resources that are not available, which creates a situation of deficit for the government. The increasing government borrowing will usually lead to an increase of the interest rates, which in turn disincline most people and individuals from venturing into a business activity or from borrowing money for personal needs (Rittenberg, & Tregarthen, 2012).
There are a few issues that arise from the crowding-out effect. The increase in the government spending with the use of resources, which are not available, leads to a decrease of resources being available for individuals who would like to borrow money. Also, if the government is looking to use the same type of products and services as the people and business, then it will lead to an increase in prices for these goods and services.
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This paper has critically analyzed advantages and disadvantages of deficit spending and the adverse influence of a crowding-out effect. Undoubtedly, there are many pros and cons of deficit spending in American government. However, it does not mean that deficit spending is a dominant part of American economic crisis. Thus, it is clear that there are many other economic, political, and historical contributing factors that have worsened American economy.