Do households make a distinction between spending for current expenses and spend

Question

Do households make a distinction between spending for current expenses and spending for capital expenses compare borrowing $1,000 to take a vacation in Hawaii to borrow $80,000 to buy a condominium and move out of your rented apartment

critics of new accounting for federal bar argue that it does not matter what the government spends the money for. what matters is a total amount that the government spends minus taxes collected. explain

How Real Is the National Debt? Applicable Concept: national debt Perhaps federal budget deficits and the national debt that makes no distinction between the rental cost of a federal office buiiding and the cost of constructing a new federal office buiding to replace rented office space. How interest payments on borrowing for a new building pro- vide the benefit of a long-lasting asset that offsets rent payments. Suppose a $200 billion deficit is reported. If a results are really not so large and threatening. For years, the late Professor Robert Eisner, past president of the American Economic Association, fought conventional wis- dom on this subject. Eisner argued that we should use real rather than nominal increases in the national debt to report deficits. Suppose the national debt is S5 trillion and capital budgeting system were utilized, the public would the price level increases by 3 percent in a given year. The nominal value of the national debt therefore falls by $150 billion. Stated differently, holders of Treasury securities would have to buy $150 billion in newly issued govern ment securities to replace the value eroded by inflation According to Eisner, this $150 billion real-vaiue inflation adjustment to the national debt should be subtracted from capital budget to manipulate the size of the deficit or an actual federal budget deficit for the year. Let's say the deficit reported by government statisticians is $200 billion. Using Eisner's “new accounting," the real deficit is only S50 billion ($200 billion official deficit $150 billion inflation adjustment). The reported deficit (change in nominal-debt is-positive-because it-injectsthsvalue-of-surpluses-of-federal, state, and-local-governments.Whern Treasury security assets to security holders to finance government spending. The amount of inflation adjustment rpluses are a source of saving in financial markets that is negative because it is a loss of Treasury security asset values from higher prices. see that most federal borrowing really finances assets yielding long-term benefits. In short, proponents of a capi tal budget believe the public's focus should be on the oper- ating budget, which gives a truer measure of the deficit or surplus. Opponents of changing the accounting rules argue that controversial expenditures would be placed in the surplus in the operating budget for political reasons. Finally, some economists argue for other numerical adjustments that show the federal deficit or surplus is really not as it seems. They say it is not the federal deficit or surplus that really matters, but the combined deficits or state and local I governments run budget surpluses, these adds to federal surpluses or offsets federal borrowing to finance its deficit. Eisner disapproved of budget surpluses. He said: "The government running a surplus, whether 'reserved for Social Security or anything else, means taking mo taxes than it gives the public in outlays. That should please nobody, neither liberals looking for more public invest ment nor conservatives who want business and households to have more freedom to make their own private spending decisions. ANALY ZE THE,ISSUE " 1. Do households make a distinction between spending for current expenses and spending for capital expenses? Compare borrowing $1,000 to take a vacation in Hawaii to borrowing $80,000 to buy a condominium and move out of your rented apartment. Eisner also warned that current federal rules of accounting are an economic policy disaster. Private busi nesses, as weli as state and local governments, use two budgets. One is the operating budget, which includes salaries, interest payments, and other current expenses. The second type of budget, called a capital budget, includes spending for investment items, such as machirn buildings, and roads. Expenditures on the capital budget may be paid for by long-term borrowing 2. Critics of “new accounting" for federal borrowing argue that it does not matter what the government spends the money for. What matters is the total amount that the government spends minus taxes collected. Explain this viewpoint. The federal government does not use a capital budget. Capital budgeting allows spreading the cost of long-lasting assets over future years. For example, the federal budget Robert Eisner, The Great Deficit Scare (New York: Century Foundation Press, 1997) 2Robert Eisner, “Jeers for the Budget Surplus," Wall Street Journal, Feb. 17,1998, p. A22.

Explanation / Answer

1.
Yes, households make a distinction between a small size, revenue expenditure and big size capital expenditure. Households involve intensive research, financial planning and evaluation of different alternatives before making an informed decision regarding the capital expenditure like buying a home or condominium. Besides, these households require different documents to approve the loans (if any) from the bank. Such intensity is missing from the purchase behavior involving buying a vacation plan. So, the distinction is there between the buying behavior of these types of products.

2.
The government spending minus the tax collection is the size of the government deficit. With an increase in the government spending, the size of the deficit increase and I contributes to the demand. Here, it does not matter that the government spends as a part of revenue expenditure or capital expenditure because these expenditure encourage the demand and firms become interested in capital investment to build the supply that will be used to cater the demand due to the spending. Hence, if the government takes all the funds, then firms will be discouraged and if government makes expenses, then firms will supply and meet the demand created by the government.

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