Deficit Spending: Definition & History

Instructor: Matthew Helmer

Matt is an upcoming Ph.D. graduate and archaeologist. He has taught Anthropology, Geography, and Art History at the university level.

Deficit spending is an important, but controversial part of today's politics. This lesson covers the basics of deficit spending and its history, then presents some critiques of the practice.

What is Deficit Spending and Why Do We Need It?

Should we spend money we don't have? Sometimes questions that appear to have simple answers actually have complex and contradictory solutions, especially when it comes to economics. Deficit spending is the practice of either printing, borrowing, or spending money beyond what is available in a budget. The word is usually used when referring to federal budgets. Think of deficit spending like borrowing on credit, but on a much larger scale. In fact, the principles of deficit spending are generally the same. The idea is that although funds are not currently available, you can still cautiously accrue debt with the probability that you will have the money later on to pay off that debt. Obviously, this is a risky practice and below we will get into the specifics about the history of deficit spending, as well as some of its positive and negative effects.

History of Deficit Spending in the United States

John Maynard Keynes
John Maynard Keynes
John Maynard Keynesgold standard

In the 1930's, Franklin Delano Roosevelt eliminated the gold standard in order to print money needed to bail the United States out of the depression and fund his legendary social reform programs known as the New Deal. In this case, deficit spending was hailed as a resounding success and propelled the United States to the world's number one economy just a few years later. In the years following, government spending steadily increased as the government sought funds for defense, social security, welfare, public schools, and other expensive programs.

Deficits are difficult to track since inflation and money values are very different than they were in the past. The most reliable way to chart deficit spending over time is through the percentage of debt to the nation's Gross Domestic Product, or GDP. A country's GDP is the sum of all the goods and services produced during that year. Since World War 2, when deficit spending was at its highest, our nation's deficit has hovered around 30% of the total GDP each year. About half of our debt is owed to the Federal Reserve. The Federal Reserve is the United States' central bank, who print extra money in times of need. The Federal Reserve issues bonds to the public, who can then redeem their investments in the government later on with interest. The other half of the nation's debt is held by foreign countries. China holds the largest sum of United States debt, with over one trillion dollars owed.

Issues with Deficit Spending Today

Today, the deficit is one of the biggest issues facing our government due to sustained military efforts in the Middle East and the 2008 financial crisis. In an effort to save the economy from another depression, our government enacted a number of controversial spending measures. The largest of these involved costly bailouts of banks and automobile companies, costing the nation trillions of dollars. For the first time since World War 2, our deficit shot up to over 40% of the GDP and continues to increase each year.

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