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As the Federal government comes to terms with large budget deficits, what will be the effect on the American economy - Essay Example

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As the Federal government comes to terms with large budget deficits, what will be the effect on the American economy

Paying down the debt too fast or too far could result in the deflationary effects on the economy due to the paradox of saving. A debt that grows too far or too fast, especially if held by foreign nationals, has the effect of weakening the dollar against foreign currencies and could potentially lead to hyperinflation and economic collapse. The budget deficits that are currently in effect are not a matter of how large they are, but are more a concern of what the money is spent on.
Spending more than the federal tax revenues take in has the capacity to fuel the economy or leave it in a state of debt with little or no return. For every tax dollar spent there is an opportunity cost. When tax dollars are borrowed to build roads or bridges, the money goes into the hands of employment and suppliers. This money is then recycled through the economy by the working class buying consumer goods. This stimulates the economy and provides jobs for autoworkers, carpet layers, and appliance salesmen who again recycle the money. However, if the money is spent on the design and testing of complex weapons system most of the money ends up draining the available pool of talented engineers and provides no commercial benefit (Nimroody and Hartung). Spending the money wisely can fuel the economy or be an opportunity lost.
While excessive government spending, and especially wasteful disregard, may seem to be an excessive opportunity cost, the consequences may be more dire than one might expect. Adam Smith introduced capitalism to the invisible hand concept, which states that people will pursue their own self-interests, which “will ultimately benefit everyone, including the unintended. He continues by saying that any interference by government is almost certain to be injurious to the invisible hand concept” (Palmer 22). From Smith’s viewpoint of the invisible hand, all taxation contracts the economy, even when necessary. When the government runs up ...Show more
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Summary

When the Federal Budget deficit nears $10 trillion and has reached a percentage of the gross domestic product not seen since World War II there is a cry of alarm from many critics. Other critics contend that the large deficits contribute to inflation by artificially increasing…
Author : dejahmacejkovic
As the Federal government comes to terms with large budget deficits, what will be the effect on the American economy
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