Government Investment

We could then argue that it makes more sense to borrow to finance government investment rather than government consumption. Although a very nice idea in principle, this approach to the government accounts often founders on the practicalities and the politics of implementation. First, it is not at all clear how to classify many government expenditures. Was a launch of the space shuttle consumption or investment? What about the wages of teachers in the public schools? What about the money spent on national parks? Second, politicians would have a strong incentive to classify expenditures as investment rather than consumption, to justify deferring payment. Another benefit of deficits is that they can play a role in economic stabilization. [1] In the short run, the level of economic activity can deviate from potential GDP. As a consequence, aggregate expenditures play a role in determining the level of output. Fiscal policy influences the level of aggregate expenditures. Changes in government purchases directly affect aggregate expenditures because they are a component of spending, and changes in taxes indirectly affect aggregate demand through their effect on consumption. Hence deficit spending can help to stabilize the economy. In summary, there are several arguments for allowing governments to run deficits. We would forswear these benefits if we were to adopt a balanced-budget amendment. [2] But we conclude by noting that there is a further, much less benign, reason for government deficits: they may benefit politicians even if they do not benefit the country as a whole. Deficits allow politicians to provide benefits to constituents today and leave the bill to future generations. If politicians and voters care more about current benefits than future costs, then they have a strong incentive to incur large deficits and let future generations worry about the consequences. Deficits around the World Do other countries also run deficits in the way that the United States does? Table 14.9 “Budget Deficits around the World, 2005*” summarizes the recent budgetary situation for several countries around the world. With the exception of Argentina, all the countries were running deficits in 2005.