The Effects of the Fiscal Deficit on the Composition of US GDP: An Analysis of Disaggregated Data

Abstract

The impact of the federal budget deficit on the economy is a source of continuing concern, both among macroeconomists and – even more urgently – among political decision makers. The old Keynesian consensus that budget deficits were generally good for the economy, in the sense of making it more prosperous (or, at least, in bringing it out of recessions), has been pushed aside by the fear that the apparently-large deficits that began in the 1980s in the United State have damaged the economy and are impoverishing future generations of Americans. The continuing debate over whether fiscal deficits make us better off or worse off – or some combination of the two – can, of course, best be addressed by returning to the data.