Summarize the arguments as to why we should not worry about the very large size of recent and current Federal deficits and our National debt. Make sure your essay clearly explains EACH of the following considerations - Deficits naturally occur with business cycles - Deficits can be used to lower unemployment now - Deficits spending can stimulate long term economic growth - Impact of R&D & public goods spending - Impact of education investments help please Solution Fiscal deficit is a situation wheere the government\'s spending exceeds the revenue earned. The debt is a more \'long-term\' fiscal deficit that pertains to prolonged fiscal deficit that creates a debt or a \'fiscal gap\' in economic terms. Much of the theory propounded by the Keynesians and modern fiscalism is that deficits of any degree are always dangerous for any economy. Deficits primarily increase the tax burden on the population as more and more tax is required to repair the deficit gap. It disturbs the trade balance since an increasing deficit means you have to pay more on imported goods. Besides, for an open economy like the US, imports constitute one of the main pillars of its economy, with 36-40% of capital used being purely imported. This in turn results in currency devaluation which is not good for an heavily investment oriented economy. Prolonged deficits also poses a threat to the investment rankings since businesses have to pay more corporate and property taxes to cover up the govenrment deficits. But the most hit are the consumers and tax payers. They bear the real brunt of a fiscal deficit since the government wholly relies on their due payment of taxes to repair the deficits. Now because the citizens are the ones most affected, their purchasing power goes down, there starts the increasing disparities in incomes since the low-middle income groups too have to face taxes. It also results in tax evasion and corruption, making the system more and more inefficient and vicious. Ultimately, the primary infrastructure is affected, jobs are lost since the government is not able to spend more on business expansion that could fill in the existing jobs, besides creating a backlog of unemployed people since the deficits do not allow a government to spend money on creating new jobs. So theoretically, fiscal deficits and debts are a dangerous sign for any economy. However, there is another side to theisdark theory. Deficits, as has been experienced by most developing and developed economies, can be a threat only for a limited period. That is, deficits that accumulate slowly over time are not as dangerous as huge deficits accumulated in a relatively shorter period of time. So to say that if deficits accounted for 2.9% of GDP in 2001 and has risen to 9.2% of GDP ($1.3 trillion) over a period of 14 years is lesser of a threat than a similar deficit that could have been accumulated in just a matter of say, 5 years. Why? Simply because an economy needs \'shock absorbers\'. When you ha.

1. Summarize the arguments as to why we should not worry about the very large size of recent and
current Federal deficits and our National debt. Make sure your essay clearly explains EACH of
the following considerations
- Deficits naturally occur with business cycles
- Deficits can be used to lower unemployment now
- Deficits spending can stimulate long term economic growth
- Impact of R&D & public goods spending
- Impact of education investments
help please
Solution
Fiscal deficit is a situation wheere the government's spending exceeds the revenue earned. The
debt is a more 'long-term' fiscal deficit that pertains to prolonged fiscal deficit that creates a
debt or a 'fiscal gap' in economic terms.
Much of the theory propounded by the Keynesians and modern fiscalism is that deficits of any
degree are always dangerous for any economy. Deficits primarily increase the tax burden on the
population as more and more tax is required to repair the deficit gap. It disturbs the trade balance
since an increasing deficit means you have to pay more on imported goods. Besides, for an open
economy like the US, imports constitute one of the main pillars of its economy, with 36-40% of
capital used being purely imported. This in turn results in currency devaluation which is not good
for an heavily investment oriented economy. Prolonged deficits also poses a threat to the
investment rankings since businesses have to pay more corporate and property taxes to cover up
the govenrment deficits.
But the most hit are the consumers and tax payers. They bear the real brunt of a fiscal deficit
since the government wholly relies on their due payment of taxes to repair the deficits. Now
because the citizens are the ones most affected, their purchasing power goes down, there starts
the increasing disparities in incomes since the low-middle income groups too have to face taxes.
It also results in tax evasion and corruption, making the system more and more inefficient and
vicious. Ultimately, the primary infrastructure is affected, jobs are lost since the government is
not able to spend more on business expansion that could fill in the existing jobs, besides creating
a backlog of unemployed people since the deficits do not allow a government to spend money on
creating new jobs.
So theoretically, fiscal deficits and debts are a dangerous sign for any economy. However, there
is another side to theisdark theory.

2. Deficits, as has been experienced by most developing and developed economies, can be a threat
only for a limited period. That is, deficits that accumulate slowly over time are not as dangerous
as huge deficits accumulated in a relatively shorter period of time. So to say that if deficits
accounted for 2.9% of GDP in 2001 and has risen to 9.2% of GDP ($1.3 trillion) over a period of
14 years is lesser of a threat than a similar deficit that could have been accumulated in just a
matter of say, 5 years. Why? Simply because an economy needs 'shock absorbers'. When you
have sudden deficits, an economy feels sudden 'shocks' that could be severly damaging. In
contrast, a similar debt accumulated in longer periods makes it easier for the government to
handle it besides offsetting the negative effects it brings.
Let us briefly state the American statistics on fiscal policy and how the 'huge' deficits have
actually helped the economy in longer periods. In 2001, the Bush administration forecasted a
surplus of $5.9 trillion. Instead, a deficit of $6 trillion was created. The war in Afghanistan and
Iraq made that deficit grow even larger as more and more was being spent on the defence sector.
The American economy still remains one of the highest spender in defence and military. The two
wars approximately put a burden of $1,400 billion dollars. Tax cuts were another source for the
growing burden - amounting to $3000 billion through 2011.
The deficit scenario is still not very positive. The ideal debt-to-GDP ratio is considered to be
around 2% of GDP. In 2013, that ratio was more than 8% of GDP. The Obama adminstration has
been much more efficient in managing this ratio. If you go through some fiscal data provided the
Treasury Dept., the deficit excluding the interest rate is close to 1%. The adjusted ratio seems to
be coming closer to the 2% mark as predictions indicate. That is a healthy trend. However, if you
dive deep into economic data, you will notice that the American economy actually grew during
those years of high deficits. Yes, there were times when everything hit rock bottom, but recovery
was very swift, inspite of fiscal deficits looming large.
During the period of 2008-2009, when deficits reached their peek, the economy recorded
negative growth rates. It recorded a dismal -8.9% in 2008. This should be noted that the swift
recovery has been possible all because of the increased spending of the government. Despite all
odds, the administration made it clear that there wont be any cuts in spending as that would
simply put growth even worse besides not solving the deficit problem in the long run. For that
revenues were needed. Substantial revenue was only possible if all the sectors grew at a steady
pace, so as to provide a reasonable amount of revenue income that could slowly eliminate the
deficit issue.
So, despite rising levels of deficits to alarming levels, overall business has seen 29% growth
since 2009 as have profits grown at the rate of 76% since Q1 of 2009. Investments and exports
share the same boat, each witnessing growth of 30% and 29% since Q1 of 2009, respectively.
Deficits are definitely helpful in lowering long term unemployment levels. The logic behind this

3. is simple; a government, if its willing to take the risk can spend reasonable money into creating
new jobs in return for a higher deficit. However, as employment increases, the payroll and
income taxes will increase since more and more people are able to pay taxes. Instead of
increasing the tax rates, the government could earn more tax simply by widening the tax base. So
there you have it, a riskier approach towards handling deficit but with a positive result in
reducing unemployment. Statistics stand as a witness to this fact. The auto industry in the US has
seen an increase of 207,600 people becoming unemployed since July 2009.
As far as education is concerned - yes, long term deficit spending helps the education sector. You
got more and more children becoming enrolled, better courses and curriculum and more
graduates and post-graduates who would contribute to the economy in the long run. Ultimately,
wise deficit spending will result in the fiscal gap reducing as time goes by.
And hence, the notion that deficits should be immediately be fixed might actually be regressive
in real economic terms. In reality, it maintains the momentum of growth, at the risk of increasing
debt that could always be ficed in the long run.