Understanding Government Deficits
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This paper examines the rationale behind government deficits and why limiting them would not be counterproductive. First, the paper describes the formula for the basic GDP formula, further citing the Keynsian outlook on boosting certain variables in the equation. Then, the paper considers the impact of elected officials on this formula, particularly in light of tax cuts. Next, the paper explores the arguments that limits on deficits are precisely what are needed to curtail entitlement spending, but also considers problems associated with this approach. Finally, the paper addresses that there is a cost associated with deficit spending no matter what its purpose. The paper concludes by stating that placing limitations on deficit spending would create chaos in the economic system, especially since it would constrain the ability of elected officials to perform many of their basic functions.
From the Paper:"It could be argued that limits on deficits are precisely what are needed to curtail entitlement spending, but this runs into two major problems. The first is that elected officials are put into office by their constituents with the full knowledge of their position on various entitlements. Bush voters wanted those tax cuts and Obama voters wanted that health care. Politicians are therefore elected with a mandate that may involve deficit spending. Legislating limits on deficits creates a fundamental problem where elected officials must continually rob Peter to give to Paul. Further compounding the issue on a fundamental level is that most Americans - those who deliver that mandate - have little idea of what precisely government spends its money on. The voting public determines much of government spending, but the voting public is not even close to being a rational investor. Only 35% of the voting public knows that most government spending goes to national defense, social security and Medicare (Rasmussen Reports, 2010).
"There is a cost associated with deficit spending, however, no matter what its purpose. The carrying cost of that debt represents a drag on efficient government function. The accounting identity could be more accurately rendered as GDP = C + I + (G-r) + (X-I) where r is the carrying cost of government debt, currently at 5% of G."
Sample of Sources Used:
- Rasmussen Reports. (2010). Just 35% realize most federal spending goes to national defense, Social Security and Medicare. Rasmussen Reports LLC. Retrieved April 8, 2010 from http://www.rasmussenreports.com/public_content/politics/general_politics/february_2010/just_35_realize_most_federal_spending_goes_to_national_defense_social_security_medicare
- Tully, S. (2010). How Obama got Keynes wrong. CNN. Retrieved April 8, 2010 from http://money.cnn.com/2010/02/04/news/economy/meltzer_keynes.fortune/
Cite this Analytical Essay:
Understanding Government Deficits (2012, November 13) Retrieved May 26, 2020, from https://www.academon.com/analytical-essay/understanding-government-deficits-152029/
"Understanding Government Deficits" 13 November 2012. Web. 26 May. 2020. <https://www.academon.com/analytical-essay/understanding-government-deficits-152029/>