I WOULD LIKE TO BEGIN THIS SECTION BY DISPELLING A COMMON MYTH, that large deficits and increasing government debt reduces the amount of dollars available for investment, reducing GDP thereby. This is a straightforward, and useful. Let me say that lots of myths gain traction because there is actually a kernel of truth in them that is then excessively generalized until it becomes fake; this declaration about increasing national personal debt is no exception. From Part 4a, I reproduced the equations in the box to the right, along with some others.
With these, I’ll show why the kernel holds true first, and then show why it isn’t, in all full cases. The reason for this is that as deficits grow, its impact is felt differently in each period. Gt – Ge becomes smaller. That in turn means there is certainly less money for Investment which is exactly what those on the proper state to be the problem, isn’t it. And, it can be a problem during a normal economy if the deficit grows too large too fast. But, if the economy is in a recession, however, then there is absolutely no problem and one of the reasons John Maynard Keynes thought it was fine, and in fact beneficial to run deficits of these downturns.
Here is the reason why. The theory is, all of that government debt “crowds out”, as the word goes, private industry from investment money. Which is true, IF they are looking for money to purchase the first place. But, only a little bit of critical thinking will lead you to the final outcome that private industry is NOT in the mood to invest during financial downturns.
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Consequently, the actual fact that authorities is sucking up investment money no matter much UNTIL the private sector decides to get again. What’s more, consider what the federal government is doing with these “loans” it is taking right out? G. (ignoring exports and imports for the short minute. ) Notice again that GDP is a function of Consumption, Investment (private), and Government Spending. Now, everybody knows that economies grow because companies and people keep investing.
People keep buying the overall economy on the “expectation” that it will keep growing (a sort of “not vicious circle”) in the expectations of making a profit. So, if Investing or Government Spending goes up, GDP up goes, if they down go, so will GDP. Let me then ask, what goes on to GDP when Trading goes into a negative overall economy down, it goes down; but happens if Government Spending rises? GDP rises, theoretically anyway.
Some of you may, or will, disagree. You say authorities spending does not have any impact on the overall economy; but, you would be wrong. OK, the finale of this right part. It must not be a surprise to anyone that when business decelerate investing, for the reason that the economy is stalling. When it can that, consumption often declines. Many on the proper believe it is okay to allow it continue, to run its course with all the attendant unemployment and individual misery that accompanies depressions and recessions. They would like to do that because they believe exercising the 3rd variable firmly, government spending, since it is useless, wrong (not the business enterprise of gov’t), or both.