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-Deficit financing is used to promote economic productivity.
-During wartime they were reluctant to tax the citizens. Deficits during this time were widely self correcting.
-Deficits increase during recessions because tax revenues decline since government programs such as unemployment benefits and welfare increase.

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-Annually Balanced Budget means that spending increases during expansions and declines during recessions.
-Cyclically Balanced Budget means that the deficits during recessions are paid for by surpluses during expansions.
- Functional Finance says that the focus should not be on balancing the budget annually but over the business cycle and making sure that the economy produces it's potential output.

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12-2c Federal Deficits Since the Birth of the Nation

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12-2c Federal Deficits Since the Birth of the Nation

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-The start of the Great Depression deficits were at 33% after the onset they rose to 84%
-Large tax cuts and high defense spending lead to higher defense spending.

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To finance the huge deficits, the U.S. Treasury must sell a lot of government IOUs. To get people to buy more of these Treasury securities, the government must offer higher interest rates. With U.S. interest rates higher, foreigners find Treasury securities more attractive. But to buy them, foreigners must first exchange their currencies for dollars. This greater demand for dollars causes the dollar to appreciate relative to foreign currencies. The rising value of the dollar makes foreign goods cheaper in the United States and U.S. goods more expensive abroad. Thus, U.S. imports increase and U.S. exports decrease, so the trade deficit increases. This means that foreigners have dollars left over after they buy all the U.S. goods and services they want. With these accumulated dollars, foreigners buy U.S. assets, including U.S. government securities, and thereby help fund federal deficits. The increase in funds from abroad is both good news and bad news for the U.S. economy. People will think foreign investment in their town is great. But foreign funds to some extent cause a decline in saving. America was once the world’s leading creditor. Now it’s the lead debtor nation, borrowing huge sums from abroad, helping in the process to fund the federal deficit. Japan and China are big buyers of U.S. Treasury securities.

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President George H. W. Bush agreed in 1990 to a package of spending cuts and tax increases aimed at trimming budget deficits. Ironically, those tax increases not only may have cost President Bush reelection in 1992 (because they violated his 1988 election promise of “no new taxes”), but they also began the groundwork for erasing the budget deficit, for which President Bill Clinton was able to take credit. It translated into an additional $240 billion in federal revenue in 2000.

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In short, federal outlays dropped from 21.6 percent relative to GDP in 1990 to 17.4 percent in 2000. Again, if federal outlays remained the same percentage of GDP in 2000 as in 1990, federal spending in 2000 would have been $430 billion higher than it was.

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The financial crisis of 2008 and the Great Recession of 2007–2009 increased budget deficits for two reasons. On the revenue side, falling employment, income, and profits cut tax receipts, along with an increase in federal outlays.

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sequestration

Automatic cuts to certain categories of federal spending enacted in 2011 to reduce the growth of federal spending from 2012 to 2021

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in 2001 unemployment increased, the stock market sank, and terrorists crashed jets into buildings and spread anthrax. All this slowed federal revenues and accelerated federal spending. To counter the recession and cope with terrorism, Congress and the president cut taxes and increased federal spending. As a result, the federal budget surplus returned to a deficit by 2002 and has been in the red ever since

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The Great Recession of 2007–2009 Cut Federal Revenues and Increased Federal Outlays, Resulting in Huge Deficits

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The Great Recession of 2007–2009 Cut Federal Revenues and Increased Federal Outlays, Resulting in Huge Deficits

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1-5 POST LABELS WHY DEFICITS BECOME BIGGER.

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shows government outlays at all levels relative to GDP in 10 industrial economies in 1997 and in 2016.

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Deficits climbed as the global financial crisis spilled into the wider economy, decreasing tax revenues and increasing government outlays.

Federal officials are not required to balance budget.

Voters like spending programs but not paying taxes.

Candidates try to maximize chances of getting elected and reelected by offering long on benefits but short on taxes.

12-12e

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

Crowding out- the displacement or interest investsensitive private investment that occurs when higher government deficits drive up market interest rates.

expansionary fiscal policy results in net increase in aggregate demand, leading to greater output in and employment in the short run.

others believe crowding out is more extensive, so they believe the opposite.

if economy is operating well below potential the additional fiscal stimulus provided by a higher government deficit could encourage firms to invest more.

Crowding in- the potential for government spending to stimulate private investment in a dead economy.

1993-2013 the japanese government pursued deficit spending that averaged 6.5% relative to GDP as away of getting that flat economy going.

government can crowd out some investors by driving up interest rates.