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A deficit is the amount by which something, especially a sum of money, is too small.

Deficit financing is government spending by borrowing. The government spends more money than it is taking in and has to borrow more as a result.

Since money is spent on projects like roads and damns for the public the government borrows from tax payers as these investments will benefit them.

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-To finance the huge deficits, the U.S. Treasury must sell a lot of government IOU's, however in order to do this they must offer higher interest rates.
-This makes Treasury securities more attractive to foreigners, but in order for them to buy them they must exchange their currency for dollars.
- The rising the demand for dollars causes foreign goods to become cheaper in the U.S and in turn making U.S. goods more expensive abroad.
-U.S. imports increase increase and exports decrease, so trade deficits increase.
-The U.S. was once the world's leading creditor, but now it's the leader in borrowing huge sums from abroad. A debtor country becomes more beholden to those countries that supply credit.

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·Federal officials are not required to balance the budget unlike the state budgeters of 49 out of the 50 states leaving our budget in a deficit since 1929 with a measly 14 years scattered within where we weren't.
·Studies show that voters like spending programs but hate paying taxes, so we tend to have more support on public spending and less support on taxes.
·Members of Congress push their own agendas without concern of  overall budget. Ex. A senator from Mississippi was able to include $1.5 billion in a budget for an amphibious assault ship to be built of his hometown Pascagoula. Best part, the Navy never even asked for the ship.

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Annually Balanced Budget

Tax revenues rise during expansions and fall during recessions, spending rises during expansion and falls during recession.

Magnifies business cycle fluctuations- overheated expansions and more unemployment in recessions.

Cyclically Balanced Budget

Deficits from recession are corrected by surplus in expansion.

Lessens buisiness cycle fluctuations

Functional Finance

Shifts focus from budget balance to keeping the economy at potential output.

Chronic deficits accumulate which could cripple an economy.

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A short-lived Budget Surplus Then More Deficits.

Exhibit 3 shows the federal budget since 1970. The red line represents relative gdp and the blue line is the revenue relative to the gdp. The pink shade shows the deficit, it looks it was on average of 3% deficit between 1970-2016. In 1998-2001 there was a surplus that is shown in the blue shade. After the surplus they’re is a huge deficit.

In the 1980s the executive and legislative branch cut spending and increased taxes to keep the deficit from getting bigger. Clinton increased taxes for high-income households in 93. Within a decade GDP 3% which means $240 billion in federal revenue in 2000.

Between 1990 and 2000 military personnel dropped by a third and decreased defense spending by 30%. In 94 domestic spending grew by a small percentage. Federal outlays dropped by 22.6% relative to GDP.

As we reached a peek in surplus in 2001 unemployment increased, the stock market sank, and terrorists attacks happened. To cope the president cut taxes and increased federal spending and by 2002 we were back in the red shade.

The financial crisis of 2008 and the Great Recession of 2007-2009 increased budget deficits because: employment was falling, income, and profits cut cut tax receipts. There was also unemployment benefits and welfare programs that received payments it increased federal outlays.

In 2011 Barack Obama and Congress put efforts to do a method of reducing spending called sequestration. They couldn’t agree on what to cut so they did cuts to every category of federal spending spanning from 2012 and 2021. Programs such social security, Medicaid, federal pension, and veterans benefits were exempt. Defense was cut the most. They cut 454 billion from defense between 2012 and 2021. Non defense programs were cut by 6.5% a year. In 2015 Congress made a second account to spend on defense but without sequestration doesn’t affect it. This is a loophole that makes the law look lesser than it is.

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12-2h The Relative Size of the Public Sector 

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12-2h The Relative Size of the Public Sector 

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-Government outlays in the U.S. relative to GDP increased from 36% in 1997 to 38% in 2016. The 10- country average increased slightly from 42% to 43%.
-Government grew the most in Japan, rising from 35% relative to GDP in 1997 to 39% in 2016. Two decades of trying to stimulate the Japanese economy swelled the public sector.

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Deficits, Surpluses, Crowding Out, and Crowding In.

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Deficits, Surpluses, Crowding Out, and Crowding In.

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“higher interest rates discourage, or crowd out, some private investment, reducing the stimulating effect of the government’s deficit.”

An increase in the federal deficit reduces the supply of national saving, leading to higher interest rates.

The extent of crowding out is a matter of debate, some economists believe that government deficits results in a net increase in aggregate demand, leading to greater output.

Others believe that the crowding out is more extensive, so this results in little or no net increase in aggregate demand and output.

The ablility of goverment deficits to stimulate private investment is called crowding in.

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Federal Deficits Since the Birth of the Nation

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Federal Deficits Since the Birth of the Nation

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-Between 1789 and 1929, the federal budget was in debt 33% in this period of time. Deficits occurred primarily in war times because of increased government spending and decreased after the end of the war.
-Since after 1939, the federal budget have been in deficit 84% of the time. The large deficit of WWII dwarf deficits in other years, and in recent decades the 1980's with their fairly high deficits. This was because the president and Congress cut taxes but not expenditures.
-The economy's improvements in the 90's resulted in no deficits and a surplus in 1998. Although a recession in 2001, tax cuts, and increased federal spending led to new deficits, which were only worsened by the expenses of the war on terror. But during the next four years, a stronger economy arose with a rising stock market caused the deficit to fall 1.2 percent relative to GDP in 2007.
-However, the global financial crisis and Great Recession from 2007-2009 increased defecits to levels not seen since WWII. This reduced revenues and expanded outlays, especially the $831 billion American Reinvestment and Recovery Act (Stimulus Program). The 2009 defecit was $1.4 trillion, 9.8% relative to GDP, and increased by $1 trillion until 2012. Excluding WWII, these defecits were the largest in history, even greater than those during the Great Depression. Fromm 2009 to 2012, aroun 36 cents from every dollar was borrowed mostly from foreign countries. From 2013 to 2016 defecits were 4.1%, 2.8%, 3.2%, and 2.5% of the GDP. Although moderate compared to 2009-2012 levels, these years added more than $2 trillion to the federal debt. The president's budget projection, which some call optomistic, still add another $4.4 trillion to the federal debt from 2017-2024.