What Have We Learned from the Reagan Deficits and Their Disappearance?
22 Pages Posted: 21 May 2000 Last revised: 10 Apr 2001
Date Written: April 2000
This paper looks again at the U.S. deficit debate of the 1980s, this time with the benefit of the Commerce Department's newly revised data for that period and also in light of the experience of the 1990s when sizeable budget surpluses replaced chronic large deficits. The familiar conclusion that sustained government deficits at full employment depress private capital formation has stood up well in both regards. By contrast, the more recent experience in particular has sharply contradicted any simple notion that the government balance and the current account balance move in parallel. Other relevant issues include the equilibrium (that is, noninflationary) unemployment rate, the response of private saving to government dissaving, and the role of debt and equity in financing private capital formation.
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