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Who’s Afraid of Budget Deficits?

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Who’s Afraid of Budget Deficits?

How Washington Should End Its Debt Obsession

Foreign Affairs,

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The level of US government debt matters, and so does how policy makers address it. 

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Editorial Rating

8

Qualities

  • Analytical
  • Eye Opening
  • Overview

Recommendation

The US budget deficit is approaching $1 trillion. Some view this milestone as ominous, while others see little to fret about, thanks to cheap credit, the ready availability of buyers for US Treasury securities and low inflation. But a preoccupation with cutting expenditures to rein in government overlooks the fact that the real driver of the deficit is a steep drop in revenue due to tax cuts. So say economists Jason Furman and Lawrence H. Summers in this concise but worthwhile treatment of a well-worn topic, which will appeal primarily to policy experts and analysts.

Summary

The national debt of the United States presently runs to 78% of GDP, and estimates call for it to exceed 100% by 2029. Many deem this state of fiscal affairs an unacceptable threat to economic growth. Conventional wisdom holds that excessive government debt causes interest rates to rise, reduces private investment and impoverishes everyone. Or does it? In some quarters, the view is that the present low-inflation and low-interest-rate environment, along with high demand for US treasury securities, makes fiscal constraints meaningless. In fact, the percentage of GDP that the ...

About the Authors

Former Treasury Secretary Lawrence H. Summers is a professor and president emeritus of Harvard University. Jason Furman is a professor at the Harvard Kennedy School of Government.

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