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Commentary: What Do Budget Deficits Do?

By Allan H. Meltzer


Deficits Do? One answer to that question is a restatement on the pure theory of debt-financed budget deficits. An alternative answer would develop the effects on the U.S. or world economies on the assumption that the U.S. federal government balances its budget by reducing spending, instead of raising tax rates, or running deficits equal to 2 or 3 percent (or higher) of GDP. The alternative answer considers not only deficit reduction but the way in which deficit reduction is achieved and the effects on resource allocation. I want to emphasize that the two answers are very different because they answer different questions. Ball and Mankiw are mainly concerned with the first set of issues. I believe most of the people in this room are more interested in the second set of issues. What happens if the deficit is eliminated by reducing government spending or raising taxes? What happens if entitlements spending is reduced enough to eliminate or sharply reduce the deficit

Year: 2011
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