Deficit spending
In English or German deficit spending deficit spending, the situation is understood that the state is in debt to generate through government contracts awarded increased demand, especially during recessions, thereby economy moving. , Debts should be ( counter-cyclical ) offset in an ideal manner in an expansion or in a boom phase by budget surpluses again. A similar effect - on the revenue side of the state - can be achieved with tax cuts.
The economic theory of Keynes
According to the economic theory of John Maynard Keynes, it comes with a decline in investment and borrowing for excessive real interest rates such as in a deflation to a severe slump in demand for goods. Because the savings must always fall at the same rate as the borrowing and this is done through the income falling with the economic crisis. For Keynes, the saving of the level of income is determined and the economic forces of the decline of the debt and the savings the correspondingly low incomes. This income is down due to the usually low savings rate to a multiple of the decline in investment and debt. Due to the indebtedness of the state, the saving of the private may increase in exactly the same extent, and thus increase the personal income according to the savings rate to a multiple of the government deficit. The savings rate determines the multiplier effect of public debt to national income. The decline of investment and borrowing is by Keynes, the cause of the crisis and therefore the state should debt in order to end the crisis, to stimulate private investment and debt starts again with better business prospects.
The idea of deficit spending can be with the IS- LM model to explain (see also Total Keynesian model). Thereafter, an increase in government demand causes an increase in aggregate demand and thus an increase in the total supply. The implied increase in production leads to an increase of the national income. The increase in income leads to a higher demand for consumer goods, which in turn leads to a higher production (multiplier effect). In the IS- LM model, it depends on the capital market to higher interest rates, which implies a lower demand for capital goods. It comes to a so-called partial ' crowding-out ', because the model assumes that the central bank does not increase the money supply in a growing economy. This assumption of the model has already John Hicks, its author, objected from the outset.
Richard Ferdinand Kahn, a close associate of Keynes had, for the first time in 1931 published an essay on the multiplier and already stressed that the banking system in a crisis is always able to provide additional credit without interest rate increase and inhibition of private investment. It is assumed that the central bank an increase of employment and economic activity does not take the occasion of a restrictive credit policy, otherwise any measure to increase employment would be futile, even waiting for the recovery of the global economy.
Functional Finance
The concept of deficit spending goes back to John Maynard Keynes. However, Keynes defined the situation of the balance in underemployment for the severe crisis of the Great Depression. During this time he advocated prominently the need for government economic stimulation through a debt-financed increase in government spending, for example in his Open Letter To President Roosevelt ( 1933). The extent to which he saw as recommended deficit spending against ordinary economic cycles, is controversial.
After going back to Abba P. Lerner neukeynesianistischen theory of functional finance the state is to straighten out the economic cycle by a continuous counter-cyclical economic policy. A returning to this theory economic policy plan, for example, the global control.
Problem
Critics accuse the deficit spending before that there are certain industries on one side before components (eg the construction industry and the defense industry ), this is called structural blindness. In addition, high government spending led to indebtedness and inflation with simultaneous stagnation ( stagflation ). In addition, a high level of public demand runs the risk of crowding out ( in the literature is also often the crowding- out effect mentioned ). By increasing government spending does not state investment would displace (if, which is not the case, would be controlled interest rates and loan interest rates of supply and demand ). Such economic policy could not fight fundamentally an economic crisis therefore. In addition, a reduction of government debt could be observed almost never in better economic times in the past - at best, there was a lower debt. Another point of criticism is the disregard of lags ( delay effect) between the Necessary Will and the effect of fiscal policy. Originally a counter-cyclical scale measure could take effect until the next economic cycle and pro-cyclical in the then prevailing situation.