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October 17, 2017 

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MARGINAL COST: The change in total cost (or total variable cost) resulting from a change in the quantity of output produced by a firm in the short run. Marginal cost indicates how much total cost changes for a give change in the quantity of output. Because changes in total cost are matched by changes in total variable cost in the short run (remember total fixed cost is fixed), marginal cost is the change in either total cost or total variable cost. Marginal cost, usually abbreviated MC, is found by dividing the change in total cost (or total variable cost) by the change in output.

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Taming Our Beastly FEDERAL DEFICIT

It's almost impossible to take a leisurely stroll around the economy without crashing headlong into the federal deficit. It doesn't take a microscope to see it bulging from the windows and doors of the Sylvester J. Peabody Federal Office Building as we pass by. It's a monstrous beast that seems to be growing by the minute. But is the federal deficit really as ghoulish and gruesome as drawn by political cartoonists? Should we make a detour of our pedestrian trek to avoid the beast? Considering it's size, is avoidance even possible. To answer these question, let's consider the pluses and minuses of our federal deficit.

The Joys of Deficit Spending

Most of us hate to pay taxes, but we enjoy the public goods made possible by federal government spending. For this reason we can be quite thankful that the federal government tends to spend a lot without finding it necessary to extract as many taxes from our pockets. We garnish the myriad benefits of government spending, without paying the taxes. What more could we want from our government?

Because we don't pay for all of our federal government goods through taxes, we must borrow the rest. The borrowing used to finance this government benevolence is the oft-discussed federal deficit.

Would You Know the Deficit if You Met it in a Dark Alley?

What is this beastly deficit that politicians and economists have debated for years? Should you be on the lookout for the evil politician who feeds this fiend with fewer taxes and more spending, or hope against hope for a public-spirited white knight who will slay the deficit with higher taxes and less spending?

Technically, the federal budget deficit is the difference between the federal government's tax collections and its spending. The difference is made up by borrowing through the issuance of government securities.

A few points to note about this definition:

  • It includes only what the federal government is doing. State and local governments, which often spend less than their tax revenues and thus run budget surpluses, are not included in everyday discussions of THE budget deficit.

  • Some federal government spending items are "off budget", which means they are not be included in THE budget deficit calculations. It's a simple correction, however, to put "off-budget" items back on the budget, if you know what to include.
What's So Bad About the Deficit?

There's nothing intrinsically wrong with borrowing to finance expenditures -- businesses and consumers do it all of the time. Few factories would be constructed, and even fewer houses would be built, if they were financed without borrowing. Borrowing can, however, create problems.

  • Excessive borrowing. Like consumers, if government borrows too much, it can place a strain in the ability to repay. In the early 1990s the total public debt -- the accumulation of all previous deficits remaining unpaid -- was approaching 70 percent of our gross domestic product pie. This is large, but not unprecedented compared to the years of World War II, when the public debt was over 100 percent.

  • Borrowing for the wrong reasons. Generating a deficit to finance wild parties or current consumption is not a very good idea. Few businesses would stay out of bankruptcy court if they borrowed merely for current consumption. If the deficit is used to finance investment, this is good. If it's used to finance current consumption, this is bad.

  • Limiting options. A large deficit reduces the government's ability to take actions that stimulate the economy during bad times, a useful STABILIZATION POLICY. The 1990-91 recession offers an example. The economy remained sluggish for several because government could not stimulate our economy by spending more and taxing less in light of a $300 billion deficit.
Can the Deficit Be Good?

The usually maligned federal deficit is not without a few good points. For example:

  • During slow economic periods, one of the best things for the government to do is run up the deficit. This increases spending, which as seen in Fact 7, Our Circular World, helps stimulate the economy. The worst thing to do during a recession is to cut the deficit or run up a budget surplus.

  • Because the government, believe it or not, is extremely trustworthy, the federal deficit and the corresponding public debt offers a very secure, low risk investment to the financial markets. Banks and others who value safety and security hold onto these safe and secure government securities.
One Way to Reduce the Deficit

The deficit can be reduced in a simple straightforward manner, cut spending and/or increase taxes. Nothing could be easier in principle, but harder in practice. One reason this simple approach is nearly impossible is the way our oft-envied system of government works.

Political candidates who promise high taxes and few government services are seldom elected to office (unless the other candidate promises higher taxes and fewer services, or is a real jerk). Elected officials have every incentive in the world to tax less and spend more, an alternative, if practiced enough, generates a deficit. It should comes as no surprise, then, that the federal government has only operated with a budget surplus in six of the last fifty years.

One method of reducing the deficit is to grow out of it. As the economy's pie grows, more tax dollars come into the U. S. Treasury. In fact, many of those six years of budget surpluses occurred because the economy grew, and the tax dollars rolled in, faster than Congress and the President could spend them.

This leads to one inescapable conclusion:


A Federal-Deficit Tip

  • If the federal government borrows, it best borrow for things that can make the economy grow. This was a lesson learned long ago by businesses, but is often less obvious in government. A business pays back borrowed funds, hopefully, through returns generated by investment in something productive, like a factory. The government can do the same by investing in growth-promoting public goods.


    What About A Balanced-Budget Amendment?

    A balanced-budget amendment would be an amendment to the U. S. constitution forcing Congress and the President to spend only the tax dollars collected each year. If the federal government collected 5 gadzillion tax dollars this year, then it could spend only 5 gadzillion dollars this year -- no more. This sort of spending constraint already exists for many state governments and a bunch of city governments, too. Why not the federal government?

    Here's the good and bad of this balanced-budget amendment.

    Controlling Our Necessary Evil

    One desired effect that's often championed by proponents of a balanced-budget amendment is limiting the power of the federal government. It probably isn't surprising that balanced-budget advocates have tended to be political conservatives who generally follow the doctrine that the "best government is the least government." Here are a couple of consequences that tend to make conservatives happy:

    • Small is beautiful. If the federal government can't borrow, then it can only spend more by raising taxes. Because voters, as a generally rule, don't look kindly on higher taxes, government would tend to be smaller, spend less, and keep its inefficient meddling out of the economy. This would also prevent re-election minded politicians from throwing borrowed pork-barrel money at constituents. Politicians would be forced to consider -- some say at long last -- the interests of angry tax-paying voters.

    • No more recessions. Part of the meddling prevented by a balanced-budget amendment would be STABILIZATION POLICIES. There are those who feel that the federal government, through the inappropriate use of its spending and taxing abilities, causes the booms and busts of the business cycle. As such, the booms and busts would be eliminated by removing any sort of discretionary control over spending and taxes. The tax dollars come in, then the federal government spends them. Congress and the President wouldn't be able to monkey around with taxes or spending in useless attempts to stabilize the economy.
    Making a Bad Situation Worse

    Like any controversy, controversy surrounds the balanced-budget amendment only because there are two opposing view. You shouldn't be too surprised to discover that political liberals tend to feel differently about a balanced-budget amendment. Here are the liberal counterpoints to those offered by conservatives:

    • Government is our friend. The federal government is the last resort and only hope for fixing many problems. Some things, like wars and natural disasters, not only require immediate responses, but need funds over and above available tax dollars. Other public goods, like bridges and highways are investments best financed with borrowed funds. A balanced-budget amendment that restricts spending to current tax dollars would keep the government from doing what it needs to do. (There are those who claim that the big federal deficits run up in the 1980s under conservative Republican presidents were really intended to do just that.)

    • No recessions, but big depressions. One problem the government tries to fix is the business cycle. It's called a business cycle because businesses play a big part in the instability. The federal government can step in, through timely spending and taxing policies, to alleviate the business cycle problems of unemployment and inflation. If the federal government has it's hands tied by a balanced-budget constraint, then business cycle problems might even worsen. In a recession, when everyone spends less and pay fewer taxes, a balanced-budget constraint would force the government to spend less, as well. Every recession likley would be worsened and some could be transformed into 1930s like depressions. In fact, in the early years of the 1930s Great Depression, the federal government did the "prudent" thing by keeping its budget balanced. The Great Depression didn't really end until the onset of the war-time budget deficit of the early 1940s.

    Here's a balanced-budget related tip:


    A Balanced-Budget Tip

  • Part of the problem with the federal government is the tendency for voters to elect politicians who promise lower taxes and more spending. We could all name dozens of programs that the government should eliminate that benefit others. DON'T CUT MY BENEFITS! JUST CUT MY TAXES! If you think that the federal deficit is a problem, then let your elected representatives in Washington, D. C. know that you're willing to pay higher taxes and get fewer government benefits. If not, then get your TV remote, a bag of chips, some bean dip, a soft drink, and don't worry about it.

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