Preventing Long-Term Economic Slump: Deficit Spending & Austerity

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Table of Contents

Introduction
Austerity
Deficit Spending
Analysis and Discussion
References

Introduction

Policymakers have received opposed ideas from economic experts on the way to prevent a long-term economic slump in the United States of America as well as Europe. One side of the debate recommends austerity, while the other supports deficit spending. This analysis aims to assess the arguments and the potential impacts of both sides in light of the theory of endogenous money.

Austerity

Austerity refers to the situation whereby a government focuses on reducing its spending and increasing frugality in the financial industry. Therefore, austerity mechanisms address the measures taken by the government to minimize expenses in a bid to tap the expanding budget deficits (Ina, 2002). Another point is that austerity measures are not commonly practiced because they incline to reduce both the quantity and the quality of services as well as the benefits advanced by the government. At the onset of the year 2009, several nations had no other option but to embark on adopting austerity measures. This was also orchestrated by the presence of budget deficits that had accumulated beyond the limit, having followed the course of action taken by some states in stimulating their economies due to the global recession of 2008 (Pratt, 2010).

Deficit Spending

There are times when the government’s expenditures go beyond its revenues where such occasions are rare. Therefore, the excessiveness in spending requires more financing, for instance, through borrowing, especially from foreign governments (Fergusson, 2010). In this regard, the increased spending by the government provides more stimulation to the economy as more funds flow in. On the other hand, consistent borrowing may adversely lead to increased interest rates (William, 2010).

As mentioned above, deficit spending serves as a fiscal policy that helps stimulate the economy in moments of recession. Therefore, during such a financial crisis, increasing government spending enhances business activities, creates more employment opportunities, and promotes consumer spending (William, 2010).

Analysis and Discussion

Looking at the above findings, it can be said that austerity will be the best way forward for any government to address the economic challenges. This is because it is important to reduce spending since that is what may lead to unprecedented costs that may just create a lot of expenses, hence occasioning a great number of financial problems. However, in the case of deficit spending, the problem will derive from the fact that there will be more expenditure in the operations of the government which will just present more financial pressure.

It is also the case that austerity and deficit spending have their implications on the economic slump. Consider Figure 1 below:

Figure 1: Economic Cycle. Source: (The Blue Collar Investor, 2012).

The diagram above demonstrates the way in which financial crisis may take place in any given economic situation. The critical trends refer to the process of recession while the others are connected with recovery. The researcher believes that deficit spending leads to recession since there are increased expenses. That means deficit spending approach will not help to alleviate the problem as expected. On the contrary, austerity has a direction towards recovery since the government is focused on reducing its expenses. Additionally, austerity enhances conservation of financial gains so that they can be consolidated to strengthen other financial sectors of the economy.

In conclusion, the best approach mechanism will be austerity since it focuses on reducing expenses, hence making more avenues for preservation of financial gains for the government.

References

Fergusson, A 2010, When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany, PublicAffairs, United States.

Ina, Z 2002, Austerity in Britain: Rationing, Controls, and Consumption, 1939-1955, Oxford University Press, New York.

Pratt, A 2010, Austerity Business: 39 Tips for Doing More with Less, John Wiley & Sons, Cornwall, UK.

The Blue Collar Investor, 2012, Recession-A Normal Part of the Business Cycle, Web.

Williams, J 2010, Deficit Spending, Kessinger Publishing, LLC, Whitefish, Montana.

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Preventing Long-Term Economic Slump: Deficit Spending & Austerity

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