In your opinion, what are the short- and long-term effects of this amount of government borrowing on GDP?GOP Congressional Committee says U.S. borrows $4 billion a day for spending Share this...

In your opinion, what are the short- and long-term effects of this amount of government borrowing on GDP?

GOP Congressional Committee says U.S. borrows $4 billion a day for spending

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Hundreds of Rhode Islanders got phone calls last week from the National Republican Congressional Committee, with a recorded message attacking U.S. Rep. David Cicilline.

Specifically, the GOP was criticizing Cicilline’s support of a Democratic budget proposal for fiscal 2012, which the Republican-controlled House defeated 166 to 259 on April 15. Similar calls were made in 22 other Congressional districts where the GOP perceives an incumbent Democrat to be vulnerable.

"Thanks to Washington’s addiction to spending, the federal government now borrows $4 billion a day," the recorded voice said. "That’s given us $14 trillion in debt. And David Cicilline is making it worse. He voted for another Pelosi budget that would strangle our economy with more spending, more debt and more borrowing from China."

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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There are so many variables at play here that even the experts can't agree on the effects of this level of debt.  That's one reason why the Democrats and Republicans can each trot out economists to defend their position.  Here's one way to look at the effects:

In the short term, this sort of borrowing can be a good thing for an economy.  When an economy is struggling, it needs (according to Keynesian economists) an increase in aggregate demand.  When the government borrows and spends more money, that creates demand because it gives money to people who then spend it on groceries, cars, etc.  An increase in aggregate demand leads to an increase (ceteris paribus) in GDP.  This is why governments try to do stimulus spending when in a recession.

The long term impacts can be good as well, if the money is spent wisely.  If the money is spent on good infrastructure projects (like the interstate system back in the '50s) it can help build our economy.  In economic terms, it can push our long-run aggregate supply curve to the right.  However, too much borrowing, or unwise use of the money, can also lead to bad effects.  It can lead to a "crowding out" effect in which private enterprise cannot borrow.  That decreases investment and lowers GDP.  Worst of all, it can decrease people's confidence in our economy.  This can be a really bad thing because it leads to a cycle in which consumers don't spend and businesses don't invest because they don't trust that our economy (with all that debt) will remain solid.

So it's a really tough call.  No one really knows because there are so many variables, one of which is the human psyche.

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