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Current and projected budget deficit

What do you think about the current and projected budget deficit (over 500 billions this year and coming years)? Do you support Bush's economic policy to further cut tax and run the Federal government through borrowing (budget deficit)? What are the effects of the current tax policy on US businesses in the short-run and in the long-run?

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First, you need to decide whether the deficit needs to be reduced. While some believe that it should be, it's important to understand the economic rationale for not doing so. Deficits are therefore not in and of themselves bad; if they allow the government to keep us out of a recession, most people agree that's a good thing. Ideally, when the economy improves, the government will rein in its spending and increase taxes to eliminate the deficit. It shouldn't be something that continuously grows, but should oscillate up and down with the business cycle. If the deficit isn't addressed, it can hinder economic growth in the long run. This is because deficit-financed government expenditures tend to "crowd out" private spending by competing for scarce resources and private borrowing by raising interest rates. Investment is more sensitive to interest rates than either consumption or net exports, so investment takes the primary hit from fiscal policy changes. Therefore crowding out always occurs when ...

Solution Summary

Budget deficits and their effects on US businesses.