September 05, 2019 Thursday
Bedtime Story
In Defense of Deficit Spending
These are the observations of Economist,
Professor and Nobel Prize winner William Wickrey in the defense of deficit
spending in contrast to a balanced budget or a budget surplus or even more
broadly fiscal conservatism (mind you that many sensible economists hold the opinion
that fiscal conservatism leads to decrease in interest rates, higher borrowings
by investors, greater investments by private enterprises, lower trade deficits
and therefore cumulative economical growth):
“Deficits are considered to represent
sinful profligate spending at the expense of future generations who will be
left with a smaller endowment of invested capital.
This fallacy seems to stem from the false
analogy to borrowing by individuals.
Current reality is almost the exact
opposite.
Deficits add to the net disposable income
of individuals, to the extent that government disbursements that constitute
income to recipients exceed that abstracted from disposable income in taxes,
fees and other charges.
This added purchasing power, when spent,
provides markets for private production, inducing producers to invest in
additional plant capacity, which will form part of the real heritage left to
the future.
This is in addition to whatever public
investment takes place in infrastructure, education, research, and the like.
Larger deficits, sufficient to recycle
savings out of a growing gross domestic product (GDP) in excess of what can be
recycled by profit-seeking private investment, are not an economic sin but an
economic necessity.
Deficits in excess of a gap growing as a
result of maximum feasible growth in real output might indeed cause problems,
but we are nowhere near that level.
Even the analogy itself is faulty.
If General Motors, AT&T, and individual
households had been required to balance their budgets in the manner being
applied to the Federal government, there would be no corporate bonds, no
mortgages, no bank loans, and many fewer automobiles, telephones, and houses.”
I hope you are able to see the reasoning
here which kind of seemed circular to me.
Firstly the economist says that while
individuals ought to be fiscally prudent and spend only the money that they
have this is not true for a nation or the government.
A government not only can spend more than
it earns but SHOULD spend more than it gathers through its revenues since this
act creates money.
Let us see how deficit spending by the
government creates money but not when you and I overspend and live beyond our
means.
When a government overspends and it is left
with no money it resorts to a trick that would shame even the legendary James
Bond – the government issues bonds.
Now what are these bonds?
Well they are nothing but papers and promissory
notes very much like the “greenbacks” of the Civil War.
Stay tuned to the voice of an
average story storytelling chimpanzee or login at http://panarrans.blogspot.com
Good night Mon Ami and my fellow cousin ape.
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Another great educator and a teacher that I am aware of is
Professor Subhashish Chattopadhyay in Bangalore, India.
While I narrate stories, Professor Subhashish an electronic
engineer and a former professor at BARC, does and teaches real mathematics and
physics.
He started the participation of Indian students at the
International Physics Olympiad.
Do visit him here:
All his books can be downloaded for free through this link:
For edutainment and English education of your children, I
recommend this large collection of Halloween Songs for Kids:
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