Twin Deficits Research Paper Example | Topics and Well Written Essays - 1500 words

Twin Deficits - Research Paper Example If people consumes more than their income, they either borrow funds or sell off a few of their properties. The individuals end up defaulting in paying what they had borrowed and thus encounter bankruptcy hence lower living standards. This applies to any nation with similar trend of expenditure (Efremidze, 2009). However, it remains clearly known that people tend to portray different life-cycle spending patterns. The young generation consumes more than their income, those of middle age tend to exercise net saving, and retirees go back to net consumption after they cease employment. Thus, it is vital to balance earnings and consumption in every time. However, there are a few shortcomings to the amount one can borrow if they will have the ideal opportunity of evading financial deterioration. If a lender observes that, the debtors have a more spending habit than their potential to refund the money, then it remains a high possibility that the creditor will charge increased charges to refl ect the raised threat related with that debt. The same is correct for a nation (Mankiw, 2012). The US Twin Deficit Experience Beginning from the 1980s (during the era of Reagan Administration), the US had high trade and budget deficits. The budget deficit had remained about $50 to $75 billion during the end of 1970s and increased to more than $200 billion in 1983. The current account or trade deficit remained about zero throughout the start of 1980s, however, went past $100 billion in 1985. A few scholars had the notion the huge trade deficits and budget deficits of the start of 1980s could cause greater interest proportions. Walter Heller argued that deficits would â€Å"send interest proportions hiking† whereas output on 30 month Treasury Bills dropped from 7.29% during February 1986 to 5.75% during February 1987. Outputs on 30 annual Treasury Bonds dropped from 8.93% during February 1986 to 7.54% in February 1987 whereas the budget deficit stayed about the same size and th e trade deficit rose marginally. The US experience on the twin deficit clearly tells which area of the deficit should receive keen and thorough study in order to curb or solve this problem wholly. The budget deficit is the challenge to address for the US since the trade deficit in the US will happen due to budget deficit (Mankiw, 2012). The US Government Budget Deficit Policy Choices The following policies if well addressed will aid deal with the challenge of budget deficit precisely and thus improve the living standards of the people of US. The three policies include: a. Support economic development and creation of jobs- a quick developing economy provides the win-win results of a huge proverbial economical tart to share, with greater employment and tax incomes, reduced safety net consumption and a reduced debt-to-GDP ratio. The advantages of this policy is that economic development provides a â€Å"win –win† situation for greater creation of jobs, which raises tax in come however, lowering security net expenses for such matters as lack of jobs compensation and food tramples. Various deficit suggestions associated to expenditure or income appears to take funds or gains from one constituency and offer it to others. A â€Å"win=lose scenario. Democrats normally campaign for Keynesian economics, which deals