You’ve heard a lot of promises from politicians this year. A major one came from Hillary Clinton, when she claimed that she would put an end to deficit spending.
As unrealistic as the claim is, it actually presents a major problem. Her limited approach to handling the economy would inevitably do more harm than good. If that seems confusing, don’t worry. This inspection of government deficits will show you just how important debt is to the economy.
The Proposition
Hillary Clinton’s promises are rather ambitious. In a clear attempt to gain voters Clinton has promised that the richest Americans and companies will be paying a lot more in taxes. She also has some costly spending plans to increase infrastructure, education and social program spending across the board.
When you weigh the suggestions, they balance out rather interesting. Fully predicting how it all ends is impossible, if for no other reason than Congress amending all of these propositions before anything is written or passed.
That said, assuming Hillary’s proposals all went exactly as planned, she could end up with a budget surplus between $75 billion and $275 billion a year, depending on inflation, interest rates and a few other factors.
Obviously this is all extremely speculative, but let’s assume these numbers for the sake of argument in order to better understand the give and take of government spending.
What Does a Deficit Really Mean
The core concept of deficit spending is pretty simple. The government budget spends more money each year than is collected in tax revenue. In order to compensate, the government takes out loans from various sources. That may feel like a simplistic outlook, but it’s enough to get started.
What happens with those deficits?
The first thing to understand is that this principle increases available revenue and sources of cash flow. If you ask a hundred economists if that is good or bad, you’ll get a hundred answers, but the one thing they will agree on is that in the right proportions, these spending habits can be beneficial.
Feeling skeptical? Let history explain.
The U.S. has seen deficits for the bulk of its history since WWII, and the overall change has been historically positive.
Still not convinced?
Great Britain has maintained deficit spending since before the U.S. was a country. Their big picture has still been a sustainably growing economy for three centuries. Now, if you follow these issues, you have some piping hot counter arguments on the tip of your tongue. We’ll cover some of those now.
Comparing the GDP
After reading so much about how government debt is good for the economy, you’re ready to fire back with recent examples from the EU. Greece comes to mind.
Here’s where things get a little more grounded. The revenue created by government loans is generally good for economic stimulation, until it exceeds a point. That point is determined by the GDP. Now, comparing debt to the GDP requires two different outlooks: the deficit and the cumulative debt.
Let’s focus on the deficit. The U.S. deficit is not the roughly $19 trillion you hear about every day. That’s the cumulative debt. The deficit for 2016 is set right around $587 billion. That’s still a big number, but it’s much less terrifying.
You can put that in further perspective by looking at the GDP and GDP growth. Those are expecting to hit $18.3 trillion and 2.2 percent, respectively.
Another number worth noting is that the GDP is forecasted to increase by $394 billion by the end of the year. Now, finding the sweet spot in all of this is extremely tricky, but the goal is for GDP growth to outpace deficit growth, and that is a primary note of concern.
Accumulating Debt
There is a second major argument against the merits of deficit spending, and it regards the cumulative debt, and it sits around $19.5 trillion. As scary as this number is, the major goal is for this number to rise more slowly than the GDP.
Part of that comes from having an appropriate budget, but another big portion comes from interest. When you look at the two, you can see that the current budget situation is not promising. So why, then, would anyone oppose budget cuts and tax increases? Keep reading, friend.
The Only Viable Solution
When governments have surpluses, the free markets are limited in resources for expanding. If Hillary actually succeeds in her plan, it would inevitably lead to a GDP shrink, and it would exacerbate the current debt problem considerably.
The only effective way to deal with the situation is to push GDP growth as fast as possible. As counterintuitive as it feels, increased government spending and/or major tax breaks are the best answer.
Putting more money into the market lets the slowly growing economy explode, and when the GDP growth quickly outpaces the debt, the associated problems disappear. Tax revenue ultimately increases as a result, and you are left with a sustainable solution that puts deficit spending to good use.
If any of this sounds familiar, it’s pretty much the exact plan Donald Trump proposed. It was built by knowledgeable economists to propose a tactic that actually resolves problems.
Regards,
Ethan Warrick
Editor
Wealth Authority
