What are the pros and cons of prioritizing eliminating the budget deficit over increasing domestic spending?

Question

In other words, if we don't increase domestic spending and aim for eliminating the budget deficit, what arguments could be made for either side?

Answer 1

For argument sake, it would be ill advised to completely eliminate a budget deficit as it removes a method for economic cushioning that the government has at its disposal, but I digress.

A definite pro for reducing the deficit, depending on how it is done, is that it will increase savings, increase the exchange rate, increase future government spending and reduces inflation.

All that is done through how the government reduces its deficit, basically, by removing cash from the money supply, often with increased taxes and the sale of government bonds. With less money in the economy the value of the currency increases as the demand has not changed. As people want the same amount of money from a smaller available pool, its relative value must increase, in order to equalize the demand with supply. This also translates into the exchange market as the currency has also increased in value relative to other currencies and the exchange rate increases. This is good because it means that domestic sellers can buy a higher quantity of goods abroad than it could before. Also, it doesn't hurt the travel industry.

As there is less money in the economy people are less willing to part with it, instead consumers will opt to save a higher portion of income rather than spend. Not only does this translate into higher future consumption, but also lowers prices (i.e inflation) in the short-run as firms have to lower prices giving consumers a higher incentive to part with their money. I don't think anyone can argue that low prices are a bad thing.

In order to accelerate the reduction of the deficit governments usually opt to reduce their present consumptions which increases reserves and future consumption.

Now on to the cons, increased exchange rate, increased unemployment, slower economic growth. I know it may be confusing that I put increased exchange rate in both the pro and con section, but that is because the exchange rate is a double edged sword so to speak.

With a higher exchange rate, foreigners are less willing to buy domestic goods at the, without going into monetary theory, higher relative prices. As importers are buying like crazy this causes a trade deficit as more is coming in than going out. This further reduces the domestic money supply and aggravates the problems associated with it.

Because producers are having to lower prices in order to sell, they tend to begin to contract their production process to yield a lower output in an attempt to increase its relative value. As a result, firms will begin laying off workers who are no longer productive. This tends to further increase the savings rate as more people are now with out an income. Firms then react by further reducing prices and output causing more unemployment and creating an accelerating vicious cycle.

Thanks to the firms and exchange rate ultimately this means slower, stagnant to negative economic growth as firms are not making as much revenue and producing less lowering GDP, the primary measure of economic growth.

Answer 2

The advantage of elimination the budget deficit is that when the government borrows it competes with companies and individuals for funds, and increases the demand for loans raising long term interest rates. It also puts inflation pressure on the economy so the fed must raise short rates cutting off economic grow tat a higher unemployment rate than they would otherwise. This is a long way of saying that the working and middle class suffer economically from government deficits but the people with money gain from the higher rates because they collect the interest.
The choice you present is a false one, because taxes can and should cover spending except during recessions, but if people must pay taxes to support government programs voters would be less likely to support wasteful programs. The tax code is not written in stone and as the social security excess decreases to zero over the next 10 years the government will have to increases income or other taxes to cover the short fall, even if there is no new spending.

Answer 3

First a wealthy-elite who hold political power awards themselves tax cuts and runs up war spending. As investors in defense contracting firms, these same wealthy-elites then benefit again as tax revenues are diverted into the coffers of the defense contracting firms. This former tax money magically becomes profits which then become magically become dividend payments to the wealthy-elite.

At this point, however, the wealthy-elite have created a problem. They have looted the treasury and lavishly overspent on the military (the source of their new-found riches), which has caused the value of the dollar to begin a free fall. The solution? Cut government programs that benefit the underclass.

The study of capitalism is a study of class warfare. The rich get richer and richer by using public funds to line their own pockets. The costs of this looting is then placed firmly upon the backs of the working class public.

Answer 4

Well, if I could really give my input, it would mean I knew what you were asking. But, I'm not certain. Sorry.

Answer 5

Who are you trying to impress?

Answer 6

Stuff.