Government spending helps the economy during a recession
This debate is referring to the US economy. By 'helps the economy' I mean that it increases economic output.
Burden of proof is shared.
Economy: "the wealth and resources of a country or region, especially in terms of the production and consumption of goods and services.
Recession: "A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade."
First round is for acceptance.
GDP = C + G + I + (X - M)
G = government spending.
By increasing government spending, GDP increases. Low taxes and high government spending is expansionary fiscal policy.
"One form of expansionary policy is fiscal policy, which comes in the form of tax cuts, rebates and increased government spending."
So why is it especially appropriate for the government to spend money during a recession? Because the more money somebody has, the more goods and services they demand. A recession is the result of low economic activity or of low demand. If government increases the amount of money people have to spend (through increased government wages, funding public projects. etc.) the more money people will spend. Increased consumption spending (made possible by increased government spending) stimulates the economy and accounts for 70% of our GDP.
This is why government spending helps the economy during a recession.
Economic equilibrium: is a state where economic forces such as supply and demand are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change.
Since we a talking about a economy in economic equilibrium (Centaurus parabus) , we must look at the economic circle flow diagram. http://economicsonlinetutor.com...
We see that the only way for the government to inject money into the economy is through government transfers or government spending. This amount of money has to be equal to the money it collects. The only way a government can gain money is through taxes or borrowing money. Since borrowed money has to be paid with taxes we will only look at taxes.
Say the government spends 100 billion dollars, they can either pay this with tax money or by borrowing 100 billion dollars (with interest), This would fufill the circular flow. The result of this, nothing if not negative. The consumers may have more money but they now have to pay more taxes, this offsets any fiscal gain from the government spending. It may be more, depending on the interest rate on the government loan. This makes spending during a recession harmful.
My opponent may say that the debt is not payed back immediately. But this too is is a harmful option. If the cost of government spending is offset, then the dollar will lose its value as a fiat currency. The world market will see that government as irresponsible or illegitimate. Because after all, what is the point of money if you can spend it and never pay it back? This is where Centarus parabus comes in, it means all other things equal. It is a term used in economics for specific examples and models. We have to make certain assumptions in order to be able to predict or analyze anything (as we are doing right now). We assume that the economy is in equilibrium, if we don't answering the question would be impossible.
Moving onto my opponents case.
He starts off by giving the formula for nominal GDP, which is correct. But we see that the C (consumer spending) would decrease an equal if not greater amount that G (government spending). This is because more of the consumers money would be directed towards taxes. They say that "the more money people have the more goods and services they will demand" This ties in with my last point, they will not demand more because they will have less money, or their money will be worth less because of high inflation, due to government loans.
They then say that gov. conributes 70% of GDP. But in fact they only contribute 21% (http://www.cato.org...). The average citezen pay about 50% of his money to taxes (http://www.nowandfutures.com...). The higher rate is because of fed interest rates and government inefficiency. So 10 dollars in taxes only generates 5 dollars in growth, thats a loss.
I have shown that government spending does not help but actually causes economic harm, I have have also shown that government spending must be balanced by taxes and loans, both of which hurt the consumers.
Con: "Say the government spends 100 billion dollars, they can either pay this with tax money or by borrowing 100 billion dollars (with interest), This would fufill the circular flow. The result of this, nothing if not negative. The consumers may have more money but they now have to pay more taxes, this offsets any fiscal gain from the government spending. It may be more, depending on the interest rate on the government loan. This makes spending during a recession harmful."
Consumption spending accounts for 70% of GDP. If the government spends borrowed money in the form of government wage increases or through public projects, people will have more money to spend. One of the key tenants of economics is that people have insatiable desires. People will desire more goods and more services the more money they have. So once government spending increases the amount of money people have in their pockets, the more those people will spend. The more people spend, the more demand there is for goods and services. In order to keep up with demand, businesses will need to employ more people. By employing more people, those employees now have more money to spend on other businesses. Okun's law shows that when unemployment falls by 1% GNP (Gross national product) rises by 3%. The result of this spending is a compounded increase in GDP so the result of this is net positive. This means that the pool of money is now greater than the amount of tax needed to pay off the initial borrowed amount. This is all due to the multiplier effect. This is the formula for the money multiplier:
Y = income
G = government spending
K = money multiplier
MPC = marginal propensity to consume (how many cents per every dollar is spent with an increase in income)
Assuming a modest marginal propensity to consume at 0.80c per every $1.00 in additional income (MPC = 0.8) the formula is as follows:
This means for every $1 in government spending, $5 of additional income will result. This supports my point that government spending will have a compounding effect and will result in a net positive amount of taxable income to repay the initial loan.
"Say the US government orders a $10bn aircraft carrier. You might assume the effect of this would be merely to pump $10bn into the US economy. Under the multiplier argument, the actual effect would be bigger. The shipbuilder takes on more employees and generates more profits; its workers spend more on consumer goods. Depending on the average consumer’s “propensity to consume”, this could raise total economic output by far more than the amount of public money actually injected.
If the $10bn increase caused total United States economic output to rise by $5bn, the multiplier would be 0.5; if it rose by $15bn, the multiplier would be 1.5.
This debt put an immense pressure on the economy, even if the effects are not visible at the present. The US government has to pay at least the interest on the borrowed money, this interest increases exponentially as the debt increases. This is the cause of the inflation. Yes, inflation itself hasnt increased very much, but it still exists. This average inflation of 4% puts pressure on the economy. This increase in debt is unsustainable and usually marks the end of a empire.
He references the multiplier effect, but as I have shown before, the stimulus generated from taxes is much less than the amount of taxes. The multiplier also relies on the MPC or marginal propensity to consume. If government spending is increased then this number will change, as taxes are increased. So we see that using the multiplier to justify economic spending is circular logic and invalid. The multiplier will change if taxes are increased because people will have a higher propensity to save, and less to consume.
He then bring up pictures of what currencies other countries hold their reserves in. The graph shows that the US dollar is the highest. This is because the US is sweeping the debt under the rug so to say. They just keep borrowing and borrowing, and that will eventually collapse the economy because people will realize the currency is just worthless paper (Germany 1942). While building up debt doesnt seem to have immediate adverse effects it has serious long term effects.
I have shown that the multiplier argument is circular and void, that building up debt is adverse for the economy, and that government spending doesnt boost the economy.
It's time to wrap up this debate and I want to thank my opponent for presenting his case.
Con: "My opponent stars off by saying that if people have more money than they will spend more. This is not true, As I said before, if the government increases spending then they have to increase taxes."
It's not clear what my opponent is arguing here. Is he saying that it isn't true that if people have more money they will not spend more?
Or is my opponent arguing that it is true but government must increase taxes to offset spending? I've already covered this in the previous round. Have we seen a marginal increase in taxes for every marginal increase in government spending over the last decade? Of course not. Under George Bush's presidency he substantially increased government spending but taxes didn't increase.
My opponent argues that government loans are "much, much more harmful than any recession" but goes on to say "This debt puts an immense pressure on the economy, even if the effects are not visible at the present." So basically he supports his assertion that the national debt is harmful by the absence of any harmful effects.
The US government does have to pay interest on borrowed money but we've increased our money supply substantially. We've borrowed X amount and X amount is due with interest but we've simply just printed more money. Our dollar is backed by nothing. It's fiat money. The only value our dollar has is the confidence that our dollar is worth something. So when we repay our debt with interest, more of our currency is demanded and held by foreigners. Demand for our currency increases the value of the dollar. It's really a significant benefit to be the world's reserve currency.
My opponent brings up that debt causes inflation. He then says "Yes, inflation itself hasnt increased very much, but it still exists. This average inflation of 4% puts pressure on the economy." First, his assertion that the debt causes inflation is supported by our lack of any substantial inflation and secondly, he says that 4% inflation puts pressure on the economy. Actually inflation MUST exist. The way we create money is by fractional reserve banking. If there was 0 inflation we wouldn't increase the money supply enough to pay interest with the system in effect.
The Fed reserve sets monetary policy so let's see what inflation should be: "
What has inflation been like the past year? "The latest annual inflation rate for the United States is 1.3% through the 12 months ended November 2014, as published by the US government on December 17, 2014. "
So actually we don't even have enough inflation!
My opponent continues his argument with the belief that any marginal increase in government spending must equal a marginal increase in taxation. This is just false. If this were the case our national debt would be 0. The whole reason for deficit spending is that it's spending beyong what is collected in tax revenue.
My opponent likens the US economy to the hyperinflation era of Nazi Germany. This is just laughable because inflation is minimal and the dollar is the most demanded currency by a large margin.
I'll end this debate by saying that I have shown government spending helps the US economy for multiple reasons.
(1) The money multiplier effect shows that for every dollar that the government spends, more revenue is created beyond the initial amount spent. This increases GDP in the long run given that GDP = C + I + G + NX where G = government spending. I have also given economic rationale behind why this occurs (the more money someone has, the more they demand. The more people demand the more business revenue businesses collect and must hire more people to keep up with demand. By hiring people to keep up with demand unemployment drops and for every 1% decrease in unemployment a 3% increase in GNP occurs according to Okun's law.)
(2) I have shown that inflation or lost faith in the dollar as a result of government spending and accumulation of national debt is bogus given the data.
Thanks again to my opponent for accepting this debate.
If people have no more money then what they stared out with before the government spending, then what is the point?
If debt increases then the long term effects will be more horrible than any recession.
That is what I ment by that.
Again he references the multiplier and the MPC. But the multiplier relies on the MPC which relies on taxes. So if taxes are increased then the MPC will go down along with the multiplier. So government spending will have less of an impact, this poin was not attacked. He points out that the Bush admin. added debt but taxes didnt increase. This is true because government spending causes either an increase in taxes or debt. The reason we have debt is because of government spending that wasnt paid for.
"The US government does have to pay interest on borrowed money" this is untrue and absurd, the fed set an interest rate on ALL government loans, right now it is 10% http://www.federalreserve.gov...
So we do pay interest on the loans and this creates even more debt. We can hardly afford to pay for the interest rates on these loans let alone the actual debt. He then says that when we accumulate debt more of our money is held by foreigners, no more of it is held by the fed, all interest profits go directly to the fed. And why would people trust a countries currency when they know it will loose value over time?
And to defend my point that debt causes inflation, it does. If more money is created to pay for loans and loan interest, then that is inflation. Any increase to the money supply is inflation.
Vote CON because I have shown that government spending will cause either a tax increase or a debt increase. Both of which are bat and will only worsen the recession.
I have also shown that it is mathmatically impossible for government spending to increase consumer spending, because of tax increases or inflation.
Thank you for this intelligent and well thought out debate.