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Deficit Spending Case Analysis

Decent Essays
Trump hopes to increase spending substantially on infrastructure, at a time when our economy does not need any boosts. This investment would be logical if his claim that our 42% unemployment rate had merit, but fortunately it is ‘fake news.’ The fact that these plans are based on looming fears of recessionary times and would be funded by deficit spending has infinite impact on this recommendation. The standard of living is a measurable quantity (amount of output/worker) which gives insight on our economic prosperity. If infrastructure-spending is spurred, the standard of living will only change in the long-run if there is an increase in the growth rate of efficiency. The growth of efficiency is dependent on investment increasing capital intensity,…show more content…
Trump has no plan to finance these plans, so deficit spending, or government dissavings, must be considered. A deficit will decrease the savings rate, which will decrease the amount of funds available for investment in the long-run (LR). A decrease in the savings rate will increase the interest rate, which goes on to reduce investment, lowering GDP. Deficits have a depressing effect on the standard of living, as the IMF urges governments to avoid them, especially large and prolonged ones. Since we do not have a plan to payback the money we would take out to finance this spending, we should not borrow it. Borrowing without a payback plan should be avoided even if it is financing capital expenditure that will benefit the LR economy by boosting output. What is being purchased has great influence, but overall, deficit spending is not ideal because the decrease in government savings will lead to a lower level of output per worker and raise the interest rate, which has atrocious SR and LR…show more content…
Increasing employment through these new projects, even though our current unemployment is lower than the NRU, means our country will be producing beyond the production possibilities frontier. Unemployment decreases more, so output and inflation will go up, and at some point interest rates will need to follow (or inflation will balloon). In the SR, unemployment will decrease and people will therefore increase their demand for goods because they can afford them. The prices of goods will increase because our resources are fixed and limited. Some of these projects will change our capital capacity (technology frontier) and that will ultimately increase production and bring down our prices again, but only if our growth of efficiency increases - which is impossible to
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