The Problem with Spending; Government Deficits Strangle Capital Formation

The Washington Times (Washington, DC), January 13, 2010 | Go to article overview

The Problem with Spending; Government Deficits Strangle Capital Formation


Byline: Richard W. Rahn, SPECIAL TO THE WASHINGTON TIMES

Even though the government is running massive deficits, interest rates and inflation are low. So, what's the problem? The following discussion will clarify the problem. Next week, I will explain the consequences of this reckless spending, and the week after, what we should do to right our economic ship.

How fast an economy can grow is largely a function of the quantity and quality of labor, and the amount of investment funds available for what economists call capital formation. Good, high-paying jobs cost money. You don't have truck drivers if no one has the money to buy trucks. More capital investment and more research and development (R&D) per worker usually enable workers to produce more per hour, which makes them more valuable and hence, able to command higher wages. The greater the number of people making higher wages, the greater the demand by these people for more goods and services, which, in turn, creates many more jobs.

The amount of investment capital available is largely a function of the quantity of savings provided by individuals and businesses (both domestic and foreign) and government. Individuals save and invest to protect themselves against loss of income, unanticipated expenses, and for such things as cars, vacations and retirement. Businesses save in order to weather downturns and invest in new plants and equipment and more R&D.

As can be seen in the accompanying table, the total amount of savings available for investment (as a percent of gross domestic product) has fallen sharply over the past decade. Individual and business savings have risen, but this rise has been swamped by the deficits in the government sector, and this is not likely to get much better. (Remember, in the late 1990s, the federal and many state and local governments were running surpluses, which enabled them to pay down their debt.)

The United States is now in a situation in which the government is taking a very large share (40 percent) of the nation's savings to finance its deficit spending, leaving a diminished pool of capital to meet the needs of both families and businesses. You might be thinking, if there are not enough savings available for investment needs, why are interest rates so low? The answer is that the Federal Reserve (Fed) has been creating money by loaning the banks nearly free money and buying mortgages from Fannie Mae and Freddie Mac. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Problem with Spending; Government Deficits Strangle Capital Formation
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.