HOW BAD IS THE FEDERAL-BUDGET DEFICIT

This paper describes two views on the economic effects of government budget deficits. According to the traditional view, deficits have a variety of adverse economic consequences. In particular, they cause domestic residents to save less and eventually to have a lower standard of living than would have occurred if the same level of government spending had been financed entirely with current taxes. A competing view, known as the Ricardian view, holds that the economy is little affected by whether a given level of government spending is financed entirely by current taxes or by some feasible combination of taxes and borrowing. Most of the empirical research on the economic consequences of deficits has failed to isolate the effects predicted by the traditional view. The paper also discusses why the conventional methods of measuring the government budget deficit are not the most economically meaningful ones.