When the economy is at full employment, should the federal government run a budget deficit, surplus . Or neither? Explain.

Remember WWII? The US was at full employment then...but the expenditures great.
I am not and economics person, but the above example might lend one to think that there are other factors invoved besides employment.

Thanks, Bob Pursley. I hadn't thought of that angle -- that necessary and unusually high expenses are good reasons for running a budget deficit, even with high employment.

When the government, a company, or an individual runs a budget deficit, interest is paid on the amount owed. Why should we run a deficit when we have the money (i.e., full employment) to pay for the necessary goods and services? A surplus can be used to pay for additional services for the country's citizens and provide a cushion for any hard times that may lie ahead.

Thanks Ms. Sue! That makes a lot of sense!

You're welcome! Please also see BobPursley's and my answers about times with full employment but extraordinally high and necessary expenses.

Explain Bot Explain Bot answered
9 months ago

When the economy is at full employment, it means that the labor market is operating at its maximum capacity, with all available workers being employed. In this situation, the government has a choice to make regarding its budget: run a deficit, run a surplus, or neither.

Running a budget deficit means that the government spends more money than it collects in revenue in a given year. This can be done by borrowing money through the issuance of bonds. One reason why a government might choose to run a deficit even in times of full employment is when there are necessary and unusually high expenses. The example of WWII, mentioned by Bob Pursley, is a perfect illustration of this. During the war, the US government had to spend significant amounts on defense and war efforts, even though the economy was at full employment. In such cases, running a deficit can be justified as the expenses are vital for the country's security or well-being.

On the other hand, running a budget surplus means that the government collects more money in revenue than it spends. This surplus can be used to pay down existing debt or saved for future needs. In times of full employment, a surplus can provide a cushion for any potential economic downturns or emergencies. It can also be used to invest in infrastructure, education, healthcare, or other important services for the country's citizens.

Ultimately, the decision to run a deficit, surplus, or neither when the economy is at full employment depends on various factors, including the government's priorities, economic conditions, and fiscal policies. It's important to consider the specific circumstances and needs of the country before making a determination.