Deficit spending
Under the Anglicism deficit spending ( German deficit financing ) is understood in budgetary and economic policy a policy through which the state incurs (higher) debt in order to generate increased demand ( directly through state-granted investments , indirectly through tax cuts or transfer payments ) , which is intended to stimulate the economy, especially during recessions ( start-up financing ).
General
From a budgetary point of view, “deficit spending” is a surplus of government spending over government revenue in the public budgets ( budget deficit ) in order to achieve a demand effect in a state of underemployment ( unemployment ) . The resulting national debt should ideally be balanced out again by budget surpluses in an expansion or boom phase ( countercyclical ) .
Keynes' business cycle theory
According to John Maynard Keynes' business cycle theory, a decline in investment and borrowing due to excessive real interest rates such as deflation leads to a severe collapse in demand for goods. Because savings must always fall in the same proportion as borrowing, and this happens through the falling incomes with the economic crisis . With Keynes, the savings are determined by the level of income, and the decline in indebtedness and thus the savings force the correspondingly low incomes through the economy. Because of the usually low savings rate, incomes fall by a multiple of the decline in investments and debt. Due to the indebtedness of the state, the saving of private households can increase to exactly this extent, and thus private incomes rise in line with the savings rate by a multiple of the national deficit. The savings rate determines the multiplier effect of national debt on national income . The decline in investment and borrowing is, according to Keynes, the cause of the crisis, and therefore the state should borrow in order to end the crisis until private investment and indebtedness start again through better business prospects.
An increase in government demand leads to an increase in total demand and thus an increase in total supply . The implied expansion of production leads to an increase in national income. The increased income leads to a higher demand for consumer goods, which in turn leads to higher production (multiplier effect). Interest rates rise on the capital market , which implies lower demand for capital goods - what is known as a partial 'crowding-out' occurs because the model assumes that the central bank will not increase the supply of money when the economy grows. John Hicks , its author, contradicted this assumption of the model from the start.
Richard Ferdinand Kahn , a close colleague of Keynes, had published an essay on the multiplier for the first time in 1931 and had already emphasized that in a crisis the banking system is always in a position to create additional credit without rising interest rates and inhibiting private investment. It is assumed that the central bank does not use an increase in employment and the economy as an occasion for a more restrictive credit policy, otherwise every measure for more employment would be in vain, even waiting for the global economy to recover.
Functional finance
The concept of deficit spending goes back to Keynes. However, Keynes defined the situation of equilibrium in the case of underemployment for the severe crisis situation of the world economic crisis . During this time, he prominently propagated the need for government to stimulate the economy through a credit-financed increase in government spending, for example in his Open Letter To President Roosevelt (1933). The extent to which he considered deficit spending to be advisable against normal economic cycles is controversial.
According to the New Keynesian theory of functional finance , which can be traced back to Abba P. Lerner , the state should straighten the economic cycle through a continuous anti-cyclical economic policy. An example of an economic policy concept based on this theory is global control .
Problem
Critics accuse deficit spending of unilaterally favoring certain branches of the economy (e.g. the construction industry and the armaments industry ); this is referred to as structural blindness. In addition, high government spending led to overindebtedness and inflation with simultaneous stagnation ( stagflation ). In addition, high government demand carries the risk of displacement effects (the literature also often speaks of the crowding-out effect ). Rising government spending would displace non-governmental investments (if, which is not the case, key interest rates and lending rates were controlled by need and demand). Such an economic policy could therefore not fundamentally combat an economic crisis. In addition, a reduction in public debt in times of better economic activity has almost never been observed in the past - at best, there was less new borrowing . Explanations for this can be found u. a. in the public choice theory , which shows economic explanations for political behavior. In connection with the median voter theorem it explains that politicians consequently avoid (at least obviously recognizable direct) tax increases in order not to endanger their re-election. Another point of criticism is the disregard of delays in effect ( delay effect ) between the requirement and the effect of fiscal policy . An originally anti-cyclical measure could only develop its effect in the next phase of the economic cycle and have a procyclical effect in the then prevailing situation.
Individual evidence
- ↑ Verlag Dr. Th. Gabler (Ed.), Gablers Wirtschaftslexikon , Volume 2, 1984, Sp. 994
- ↑ John Maynard Keynes, General Theory of Employment, Interest and Money , Berlin 1936, p. 95
- ^ John Maynard Keynes, General Theory of Employment, Interest and Money , Berlin 1936, p. 101
- ^ John Hicks, Mr. Keynes and the Classics - A Suggested Interpretation , in: Critical Essays, 1967, p. 140
- ↑ John Hicks, “IS-LM”: An Explanation Source , in: Journal of Post Keynesian Economics, Vol. 3, No. 2 (Winter, 1980-1981), pp. 139-154, p. 150
- ^ Richard Ferdinand Kahn, The Relation of Home Investment to Unemployment , in Selected Essays on Employment and Growth , Cambridge University Press, Cambridge, 1972, pp. 2 f.
- ↑ Cynthia Clark, The American Economy , 2011, ISBN 978-1-59884-4610 , p. 126
- ↑ "Lerner's thoughts are attributed to Keynes because textbook writers, wanting to make Keynes's thinking clear, were immediately drawn to Lerner's thinking" in: www.econlib.org