Posts Tagged ‘Misunderstandings’

Keynesian Policies and the National Debt

Thursday, February 4th, 2010


While it is true that the net federal government debt rose from about $3 billion in 1939 to over $22 billion by 1975. In practice, it is common for budget deficits to be financed by a combination of borrowing and “printing,” a practice that can be economically beneficial as long as the “printing” of money is kept within reasonable limits.

Part B: The National Debt

We have seen that the use of government fiscal policy to stimulate the economy during recessions requires that the government borrow money (mostly through bond issues) in order to finance its budget deficits. The total amount of federal government debt thus incurred – the amount of money owed by the federal government – is called the “National Debt.” By 1983 the National Debt will amount to over $100 billion, or nearly $4000 for every man, woman, and child in Canada.

The National Debt has, over the years, been the subject of a great deal of misunderstandings, fears, myths and political hypocrisy. Many Canadians believe, for instance, that the National Debt is owed to other countries and that Canada may go bankrupt because of it. Both of these are myths. On the other hand, few Canadians appreciate the real dangers concerning the National Debt. We will examine first the myths, then the real dangers.

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Government Failure to “Balance its Budget” – Why?

Monday, February 1st, 2010


This concern is often expressed in the words that “any business that ran that way would go broke.” Sometimes the reference is to government inefficiencies and waste, which no one condones, but often the reference is to budget deficits and the rising National Debt. However, the matter is not that simple. Most successful businesses accumulate not only productive assets but also more and more liabilities, or debt, reflecting the money that was borrowed to finance those assets. Businesses do not regard such a situation as bad management; indeed, the acquisition of the assets can be financially beneficial to the company by increasing its profitability.

Just as a growing economy requires more private productive assets, such as factories and equipment, it requires more social assets, such as roads, hospitals and schools. Both private and social assets are typically financed by borrowing, so that the debts of businesses and governments (as well as households) have risen. The simple fact that these debts have risen in no way proves mismanagement on the part of governments or businesses or households in general.

Another problem that contributes to misunderstandings concerning government deficits is that many people confuse a government budget deficit with business “loss.” Some types of government budgets lump together all spending – for “current” purposes such as payroll and “capital” purposes such as airports – so that, whenever social assets are bought or built, the government’s budget shows an excess of spending over the current year’s tax revenues, or a deficit. By contrast, a business’ income statement does not include “capital” expenditures, on items such as plant, as current expenses, and its balance sheet shows its assets as well as its liabilities (or debt). Governments’ budgets generally show the liabilities without showing the corresponding assets.

Furthermore, no business has the responsibility to prevent recessions in the economy, and deficit spending – financed by borrowing – is a proven method of fulfilling that responsibility. Rising unemployment gives the government the choice of either ignoring the problem or using deficit spending to combat it. Considering that the government is responsible for maintaining “full employment,” it could well be argued that good management sometimes requires the government to have budget deficits.

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Government Failure to Balance its Budget Why?

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Government Failure to “Balance its Budget – Why?

Friday, October 2nd, 2009


This concern is often expressed in the words that “any business that ran that way would go broke.” Sometimes the reference is to government inefficiencies and waste, which no one condones, but often the reference is to budget deficits and the rising National Debt. However, the matter is not that simple. Most successful businesses accumulate not only productive assets but also more and more liabilities, or debt, reflecting the money that was borrowed to finance those assets. Businesses do not regard such a situation as bad management; indeed, the acquisition of the assets can be financially beneficial to the company by increasing its profitability.

Just as growing economy requires more private productive assets, such as factories and equipment, it requires more social assets, such as roads, hospitals and schools. Both private and social assets are typically financed by borrowing, so that the debts of businesses and governments (as well as households) have risen. The simple fact that these debts have risen in no way proves mismanagement on the part of governments or businesses or household in general.

Another problem that contributes to misunderstandings concerning government deficits is that many people confuse a government budget deficit with business “loss.” Some types of government budgets lump together all spending – for “current” purposes such as payroll and “capital” purposes such as airports - so that, whenever social assets are bought or built, the government’s budget shows an excess of spending over the current year’s tax revenues, or a deficit. By contrast, a business’ income statement does not include “capital” expenditures, on items such as plant, as current expenses, and its balance sheet shows its assets as well as its liabilities (or debt). Government’s budgets generally show the liabilities without showing the corresponding assets.

Furthermore, no business has the responsibility to prevent recessions in the economy, and deficit spending - financed by borrowing – is a proven method of fulfilling that  responsibility. Rising unemployment gives the government the choice of either ignoring the problem or using deficit spending to combat it. Considering that the government is responsible for maintaining “full employment” It could well be argued that good management sometimes requires the government to have budget deficits.

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The National Debt

Thursday, September 17th, 2009


We have seen that the use of government fiscal policy to stimulate the economy during recessions requires that the government borrow money (mostly through bond issues) in order to finance its budget deficits. The total amount of federal government debt thus incurred – the amount of money owed by the federal government – is called the “National Debt.” By 1983 the National Debt will amount t over $100 billion, or nearly $4000 for every man, woman, and child in Canada.

The National Debt has, over the years, been the subject of a great deal of misunderstandings, fears, myths and political hypocrisy. Many Canadians believe, for instance, that the National Debt is owed to other countries and that Canada may go bankrupt because of it. Both of these ideas are myths. On the other hand, few Canadians appreciate the real dangers concerning the National Debt. We will examine first the myths, then the real dangers.

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