11 August 2015

Good Arguments For Deficits

Just a few quick thoughts on reasons that governments should run deficits. I might go more in depth on each of these later on (I've been planning to write a post on #1 and #3 for a while).

1. Seigniorage Revenue:

The growth of real money demand and the price level over time mean that there is a consistent stream of revenue flowing to the government that show that deficits are optimal for ensuring the stability of government debt in the long run.

2.  Government Spending Smoothing:

Tax revenues from distortionary taxes (i.e. nearly every form of revenue that a government can get) are quite volatile, so government spending should be smoothed so as to not exacerbate business cycles.

3. Deficits Do Not Distort; Taxes Do: 

In circumstances when the monetary authority can't stimulate the economy during a recession, it makes sense to increase government spending. The benefit from this new spending would be reduced since if it were funded with distortionary taxes; deficits do not distort.

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