Thursday, October 23, 2008

Fiscal Deficit

Fiscal deficit
Another word that seems to scare American politicians appears to be fiscal deficit. Why are they afraid? Because fiscal deficit is bad! Why is fiscal deficit bad? No idea!!!

Some theory behind the story of Fiscal deficit; It is a common practice in economics to just state the theory, assumptions are also presented but many a times they take the back seat. So the story of the fiscal deficits begins with some such assumptions.
The theory says that when ever there is fiscal deficit, there will be inflation. (Therefore fiscal deficit is bad! What about the assumptions?) One of the most important assumptions behind this theory is that of full employment. Fiscal deficit leads to inflation if and only if the economy is in full employment. That is to say, all the resources, labour, capital, natural resources are already employed and there is no scope for further increase in production, will a fiscal deficit (where in the government spends a lot more than it earns) leads to a situation where too much money is chasing too few goods and there will be inflation in the economy. So what is so scary about it that Mr McCain wants to go for a balanced budget?
I don’t know.

Under the conditions of the assumption, there will definitely be inflation, true. But what if the assumption is violated? In the presence of spare capacity in the economy, there is always a chance that fiscal deficit which is used to print money (monetised fiscal deficit) will lead to better utilisation of the existing capacity/resource to improve production and therefore be beneficial to the economy.

What are the current economic conditions here in United States? Does the situation warrant a balanced budget?

Well currently unemployment is very high. There are a lot of people wanting to work, but are finding no work. There are producers who have excellent prospects but are slowing down due to lack of credit. The propensity to consume is weak, consumer driven American economy is slipping into a recession. We might already be in the midst of a recession!! It does not take very long to get from recession to depression, a balanced budget or a budgetary surplus is just the shortest way to get there!

So why is Balance budget good? And Ms Palin was so proud of her fiscal achievements in Alaska? Well it is alright to cut down expenditure on extra cars, fancy dinners, business class air tickets, but what about schools, what about infrastructure and what about productive expenditure? No answers I guess…

The candidates will keep harping about balanced budgets! Please vote for us, we will give you a balanced budget and as a complimentary offer, we will give you a small piece of hell….

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