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Balanced Budget

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Balanced Budget
Todd Driscoll
ECO 203 Principles of Macroeconomics
Instructor: Jason Friedline
October 23, 2012

Balanced Budget
Economists generally agree that high budget deficits today will reduce the growth rate of the economy of the future. The difference between what a government spends and what it collects in taxes in a given period is known as a budget deficit. There are many reasons why this might happen. One might be that if our government keeps spending money that does not exist obviously the more debt will accumulate. The government cannot keep this up without creating more debt. It the same as budgeting you personal accounts. If you get a new credit card or loan to consolidate old debt and then re-use your old cards, it rather defeats the purpose of getting out of debt. Another reason might be that due to the enormous loss of jobs there are less taxes being paid to pay our nations bills or to re-invest back into the economy. There is no point to list these reason in number order there are so many. If the deficit is growing it affects the nation savings, in turn, reduces national income. This may become possible if interest rates go up or domestic investments fall. Economists agree these a few things on when it comes to a high deficit. Deficits over a short period do not really have much affect, because the United States can borrow to cover these gaps due to the dollar’s value as the leading currency. If the deficit is sustained over a long period then is does have more an affect on the national debt. This will drive the interest rate payments up and takes away from the resources. When collective deficits reach 90% of our GDP the countries growth rate starts to be affected. If the U.S. stays of this path of borrowing and not investing into the economy, we will see this affect within the next decade. This means that our kids will have to deal with this problem as they are trying to finish school and get good jobs. In addition, a sustained deficit would start to doubt with our creditors in the ability to pay back loans. It is no different than if us as individuals stopped or were in over our heads in debt that our debt to income ratio would keep us from getting new loans or credit cards. In extreme cases, high budget deficits can destabilize entire economies, either because a government resorts to the printing press to finance deficits or because investors lose faith in a government's ability to service debt, thus leading to a sovereign debt crisis. Government spending is getting way out of hand.
It absolutely matters what our leaders spend money on. If the money were used to build our economy for the future then it would be in the best interest of the nation. If that were the case, it would invest in the future of our economic growth and eventually start to reduce the debt. Spending money on things that are not conductive to creating jobs or building future growth then that would not be a good thing. I have noticed that in the past sixteen years the government has borrowed money for a “quick fix” something that will make the term president popular for his time in office. The long-term fix is never put in place. For example, President Clinton balanced our budget for the first time in I do not know how long. Why could we keep this balancing stick and continue to keep it balanced? Spending! Bush ruined this country. I feel bad for Obama; he has done everything possible to get our country back on track. We are on the right track, but it is going to take decades to turn our nation around not four years. By creating new growth through investing in small businesses will create more tax revenues while cutting spending on unemployment, because people would be working. By doing, this would reduce our national debt. There is no way around creating debt, but will this increase be beneficial in the end or will it just be a quick fix with no reward in the future. Economic literature is devoted to an assessment of the effects of monetary and fiscal policies under flexible exchange rates and assumptions of perfect capital mobility. However, this research has previously concentrated on either the short or the long term. The purpose of this research is to demonstrate the relationship of these variables in both the long and the short-term outlooks. In the short term, domestic income and employment can be expanded through either monetary or fiscal policy. Both policies would work to expand the economy by increasing aggregate demand. However, under fiscal policy, the expansion in the domestic economy will result in deterioration in the balance of trade. Short-term increases in the trade balance will be achieved under expansionary monetary policies. In the end, these effects on the trade balance are reversed with fiscal policy providing the stimulus to trade. This research further indicates that in the end, expansionary monetary policy will cause a fall in domestic income and employment. The reason for this decline is that the trade balance is a part of overall demand. Since trade falls in the end, so will aggregate demand, and so will domestic income. Figures.
Fiscal policy is the changing of spending and taxation. This includes things like tax cuts, more spending, and might lead to a bigger deficit. For example, if the government borrows money to invest in jobs this would lead to a higher deficit, but in a good way. Monetary policy is now based in many countries on the setting (or targeting) of a key interest rate, such as the Central Bank discount rate. The amount of money in existence then arises from the interaction of the private sector and the banks, based on the demand to hold money and the willingness of banks to provide loans. Monetary policy has become closely linked with the targeting of the rate of inflation. In the situation, that our nation is in at the moment is a very touchy subject full of many different opinions on how to lower our deficit and create more jobs. The deficits that the nation accrues affect the budget and the economy. Initially, the spending may result in an economic boost, such as, the tax relief check we all received. This is true in a recession. This is because deficit spending shoots liquidity into the economy. Spending may also pump money into other areas to create job. On the other hand, resulting debt is very harmful to the economy, and not only because of soaring interest rates. The government could let the value of the dollar decrease in order to pay back these deficits cheaper, but this would also deter foreign governments willing to buy bonds, which would make interest rate skyrocket. Today the greatest fear is social security. When the age of the baby boomers retire, if the government cannot find a way to pay back the money borrowed from themselves then funds would not be available to pay them. If this were to happen government spending would have to be focused more on paying them, which would raise taxes, slow the economy, and provide less stimulation. The market for balances held at the Fed banks is the link between monetary policy and the economy. Depositor’s hold accounts at the reserve banks in which they trade balances held in the federal funds market at the federal funds rate. This is the FED can have control over the supply and demand of these funds. If any changes or even the thought of changes were to occur in the federal funds rate could have a trickle down affect on the economy. Things that would be affected might include short and long-term interest rates, value of a dollar, and stock prices. Changes in these areas would trickle down to households’, businesses’, spending decisions, which will have an affect on aggregate demand and of course the economy. Federal deficits reduce future living standards by slowing the accumulation of national wealth as they lower national saving. Deficits reduce national saving by shifting resources into public and private consumption through increases in federal spending and cuts in federal taxes. Those impacts on national saving can occur even if financial market prices, such as interest rates, are not significantly affected. Deficits also can lower labor productivity by reducing domestic investment, although capital inflows from abroad tend to mitigate that effect. The past decade or more has put us in a big hole due to several wars. This is what has caused us to be put into a financial crisis. The large amounts of spending due to bailouts and stimulus have been the attempt to get us out of debt in the end. The question that needs to be asked is will we be in the same situation we are in now when the wars finally end? My answer is yes, because we have accumulated so much debt that it will decades more to become balanced once again. With the runaway inflation rates, fear of debt crisis, and the value of the dollar drowning D.C. is baffled and in a bi-partisan battle. Unemployment is not only undermining millions of American’s, but also destroying America’s future. It is funny how things work. For example, if you were to loose your job and could not find work soon, the likelihood of finding a decent work would be slim to none. The longer you are out of work the harder it would be to find work, because as time passes the qualification are changing and companies look for qualified employees. The deficit is not the critical variable. The key is the size of government, not how it is financed. Taxes and deficits are both harmful, but the real problem is that government is taking money from the private sector and spending it in ways that are often counterproductive. The need to reduce spending would still exist-and be just as compelling-if the federal government had a budget surplus. Fiscal policy should focus on reducing the level of government spending, with particular emphasis on those programs that yield the lowest benefits and/or impose the highest costs. By watching what the government spends its money on is critical, because gathering debt is going to happen but what do we want to get out of these expenditures? We want to see a return in the end to boost our economy, create more jobs, in turn would have more taxes paid in. This would eventually start to reduce our national debt slowly but surely. If we can stay out of costly wars in the next decade or so, we might be able to get back to a balanced budget where everybody is happy.

References
Daniel J. Mitchell, Ph.D., is McKenna Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
Fears and failure. (2011, May 07). Chattanooga Times Free Press. Retrieved from http://search.proquest.com/docview/865103520?accountid=32521
The role of monetary policies and macroeconomic convergence in the development of financial systems in south Mediterranean countries (2012). . Rochester, Rochester: Retrieved from http://search.proquest.com/docview/1095364638?accountid=32521
Rodriguez, C. A. (1979). Short- and long-run effects of monetary and fiscal policies under flexible exchange rates and perfect capital mobility. The American Economic Review, 69(1), 176-176. Retrieved from http://search.proquest.com/docview/233042623?accountid=32521

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