Governments should deficit spend in a recesion
Debate Rounds (4)
Consequently, western countries that adopted Keynesian principles experienced almost uninterrupted growth of debt. At present, most governments (with the notable exceptions of Greece and Iceland) can still pay the interest by taking on new loans. However, the current system ensures that in the long-term the default is virtually unavoidable.
Since, thanks to the Keynesian economics, the government is now a major part of the economy, its default is likely to result in worse crisis than the Great Depression.
It is very important for governments to be fiscally responsible. In normal times expenditure should be reasonable. However, receptions are not normal times. In a recession, the people of an economy are saving. Everyone is afraid to spend. This causes high unemployment and low output. As, when someone spends money at (for example) at a shoe store, the shoe store owner gets money to spend, and pays someone, who pays someone, and so on. When everyone starts "saving" this multiplier effect does not happen and jobs are lost.
In a recession, there are unemployed people who want to work, and unused equipment/factories. And, this condition may last for a long time. This causes permanent damage to the economy and is unfair to the people who have to live through it. When people are unemployed/underemployed they will not get training that they can use in the future. If a recession lasts too long the economy will be worse when it is healthy.
Also, it is very unfair for people to live through. People get much of their pride and self worth through their job. Recessions damage the quality of life of a country. People who graduate college in a recession year make less than those who do not years down the road. It is unfair to severely hinder the chances of success of a generation just because their is a recession.
The good thing is that their is something the government can do about a recession. They can spend money. It would be great if this money goes to useful purposes, but even spending money on useless projects will help the economy. (I mentioned the multiplier affect briefly), That is, if a government spend $1, the person who receives it may spend say 80% of that $1, and the person who receives that may spend 80% of it and so on. This multiplier effect means that for every $1 spent much more economic activity is created.
And, the government is the person who should step up and do this in a recession. Companies, people ect, are all fearful and will not spend. The government can save the economy from the recession (and all its awful affects) by spending. In better times the money can be paid back and spending reduced.
Deficit spending is fundamentally the same. You say "in better times the money can be paid back". How come there was never "a better time" in the last 60 years? In virtually all countries where governments adopted Keynesian models, the debt is consistently going up. It increases faster in recessions and slower during periods of growth, but it always changes in the same direction.
We know how this generally ends for alcoholics. Why should it end differently for our economic system?
My opponent worries that a country may default ad be unable to pay its debt. This is a concern, but not much of a worry, and should not stop a country from ending a recession.
My opponent mentions how debt is always growing. But, when considering default the debt to GDP ratio is much more important metric. The GDP represents the revenue base the government can take taxes from. So, if a government has a lot of debt, but also produces a lot of GDP, default is not much of a worry as the country is producing a lot to repay the debt.
Let's look at history to see if the current level of debt to GDP is a worry. (1) (2) Both, the USA and England. In England in 1950 debt was 2.5 times GDP, and now it is about .5 times GDP. In the USA Debt of .8 GDP in 1950 and now it is about .35 times GDP. Both, these countries have reduced the debt burden they racked up from WWII (which ended the great depression). So the claim that the debt burden will never be reduced does not hold any water as evidence shows that it has.
To reduce the debt burden all a country has to do is pay the interest on debt, and the debt burden will decrease as GDP increases and because of inflation. In round 1 my opponent admits that most countries can pay the interest on debt, which is all a country has to do to reduce the debt burden and probability of default.
Another measure of the probability of default is interest rates. (3) USA 10-year T-bill interest rates are as low as ever and have been dropping since the 2008 recession. USA treasury bills are regarded as RISK free by investors, the safest investment that there is. In fact, the real interest after the recession was negative for a bit, meaning that investors were paying for their money to be put into bonds so it is "safe". (4) For a brief time after the recession, credit rating agencies downgraded U.S Bonds from AAA (outstanding) to AA+ (excellent). But, now the credit rating is AAA again, the best credit rating possible.
My opponent falsely equates the amount of dent to measure the debt burden, when rally debt to GDP measure the debt burden. Governments have reduced the the burden after WWII and the Great Depression, and the current debt burden is no where near the level it was in 1950. If governments can handle their historical high levels of debt, surely they can handle the current levels of debt which are no where near what they were back then. Further, my opponent admits that a country can pay the interest on debt which is all they need to do to reduce the debt burden.
( 3 ) http://krugman.blogs.nytimes.com...
Subprime mortgages and Greek treasury bills were also recently regarded as very low risk. We know how that ended. To be fair, it is possible that the US government will remain solvent in the next ten years. However, the longer it continues to live on the borrowed money, the worse the final crash is going to be.
2) "GDP ratio is much more important metric"
Correct. But the debt to GDP ratio has more than tripled over the last thirty years. It did fall for a while after the WWII (which was obviously a one-time catastrophic event). Back then governments were able to cut the military spending without hurting the voters. However, now most of the government spending goes to social programs which can be seriously cut only at the cost of political suicide.
3) "In England in 1950 debt was 2.5 times GDP, and now it is about .5 times GDP. In the USA Debt of .8 GDP in 1950 and now it is about .35 times GDP. "
Where did you take those numbers? The official government statistics states that the government debt is now over 90 and 100% of the GDP for the UK and the US respectively (excluding unfunded liabilities to Social Security and Medicare programs which would triple the latter number).
1) Subprime mortgages and Greek treasury bills were also recently regarded as very low risk...
I know markets can be wrong...but it does not follow that just because markets can be wrong that US T-bills are risky. And, subprime morgages (meaning more risky than prime) and greek t-tbills are regarded as more risky than usa treasury bills.
2) Correct. But the debt to GDP ratio has more than tripled over the last thirty years.
It has in the usa, but even so the usa has reduced their debt that got the out of the great depression. (1) Canada has reduced their debt burden through the 1960s and 1990s into the 2000s. (2) Australia also has decreased their debt burden throughout the late 90s. It seems my opponent is wrong when he stated that in virtually all countries the debt is always going up. At leat he was wrong about the debt burden going up.
(3) Where did you get those numbers?
If you follow the link I gace, you will see the numbers from the federal budget. But, the numbers refer to public debt. That is why there is a difference. The numbers I showed still make my point that the debt burden is reduced by governments.
As I have stated recesions are terrible things. They are unfair, cause hardship, damage to people and damage to the future economy. However, if the government steps in and spends (because no one else will, that is why there is a recesion), they can end the recesion.
Demand will increase and unused factories/equiptment will be used and unemplyed people will be unemployed. The unemployment rate does not plumet not caused because everyone becomes stupid/lazy, it plummets because everyone is scared to spend.
I do not believe countries should spend forever. They become fiscally responsible when the recesionis up. But during a recesion countries should spend, grow GDP and end the recesion.
Recessions certainly cause a lot of pain, but overspending is not going to solve the problem. All it can do is postpone it until it grows too big to be postponed any further.
Anyways, thank you for the discussion. I hope that history will prove that you were right and my pessimistic prognosis was entirely groundless.
1 votes has been placed for this debate.
Vote Placed by bladerunner060 2 years ago
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Reasons for voting decision: Pro's resolution was ONLY about recessions. Con's main rebuttal was that deficit spending continues in a non-recession, however, that wasn't the resolution, and Con can't show it as NECESSARY. That we should do X is only slightly affected by the likelihood that we will ALSO do Y, if Y is a bad thing. I think Con should have focused more on whether deficit spending actually WORKS to fix recessions, and less time on the argument that the deficit won't go down after the recession is over. As Pro notes, in general the debt to GDP ratio DOES go down, even if there are isolated circumstances in which it does not, and that hurt his "the debt always goes up" point, which meant that, as that was the only egg he had in his proverbial basket, his arguments failed in my opinion. All other categories seemed equal enough. As always, happy to clarify this RFD.
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