1. THIS MORNING:
1. Why absolute insistence on a balanced budget may be misguided.
1. Note:The Republican position on the need for lower taxes and balanced budgets can be found at
1. Or go "Republican position on Government Spending"
2. RECAP:
1. One can argue that not all of government spending is consumption; some, even a large portion, can be thought of as investment.
2. So, a question arises: should the budget be balanced at the expense of need public investments?
3. The size and danger of the national debt are often overstated.
1. See especially Bernstein and Heilbroner.
2. To whom is the debt owed? How large is it?



3. THE USES OF BUDGET DEFICITS:
1. The case for deficit spending:
1. Macroeconomic policy: effort to



2. Fiscal policy: attempt to control aggregate demand.
3. The economy in balance: relatively low unemployment and stable (gradual) price increases
1. "Full" employment and no inflation.
4. Aggregate demand
5. Inflation: rapid rise in prices and interest rates
1. Interest rates = the cost of money
2. Government attempts to reduce aggregate demand by "taking" money out of the economy: it reduces spending and/or increases taxes.
3. The net result is reduction in income leads to lower aggregate demand.
4. Price increases moderate but unemployment may rise.
6. Recession: increasing unemployment, wages, economic growth.
1. Government attempts "prime the pump" by cutting taxes and/or increasing spending.
2. It may need to run deficits to do so because the idea is increase demand by leaving the public with more income than it had.
1. See Bernstein and Heilbroner for an explanation of the benefits of "deficit" spending in a recession.
2. Economists debate the efficacy of fiscal policy.
1. But compare the swings in the economy before World War II with the postwar period.
3. Monetary policy
1. Control of the money supply
2. The Federal Reserve System as a fourth branch of government.
3. See the article on the class web page.



4. SUMMARY:
1. The need for balanced budgets is at a minimum debatable.



5. NEXT TIME:
1. American political culture
2. Reading:
1. You should have read the "Federal Budget" material on the course web page.
2. Read the material in "Macroeconomic Policy" on the web site under Reserve Room Political economyMacroeconomic policy
3. Please read Bernstein and Heilbroner, Debt and Deficits; it's a real eye opener.
1. You might then write Biden, Castle, or another senator or representative asking them to respond to the book's (and my) claims. Go to the course home page "Do Something" then "Write"
1. Note: Roth does not have an e-mail address.
2. I would be very curious about the response, so much I might reward you a teeny tiny bit.

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