Budget Deficits Only a Minor Crisis_Barro_WSJ_01-16-1987

Budget Deficits Only a Minor Crisis_Barro_WSJ_01-16-1987 -...

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Budget Deficits: Only a Minor Crisis By Robert J. Barro. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 16, 1987. pg. 1 Abstract (Summary) My wife was skeptical. Couldn't it be that all of these indicators were right, and that the budget deficit was just not a big deal? Anyhow, where did this CBO economist get his information if not from all the data that gave different answers? Probably he was just a slave of some outmoded economic theory that predicted effects that hadn't shown up. Moreover, didn't David Ricardo have a theory that said that budget deficits were roughly equivalent to taxation, and didn't this theory conform pretty well with the evidence that this CBO fellow said we should ignore? I agreed with my wife and assured her that a growing number of economists were coming to that viewpoint, but that we still numbered only 22% of the membership of the American Economic Association. I admit that federal budget deficits since 1984 have been higher than I would have predicted, based on a model that views deficits as a device to smooth out tax collections over time. For example, the budget deficit for the current fiscal year, when measured as the change in the privately held public debt, is about $210 billion. I would have predicted a deficit of between $110 billion and $170 billion: $60 billion associated with the federal net interest payments of $130 billion, $50 billion for the persistent failure to reach full employment, and as much as $60 billion to offset the surplus of the state and local sector. That leaves an excess deficit of $40 billion to $100 billion. Smaller but still significantly positive values apply for 1984 and 1985. Moreover, the proposition has been spectacularly wrong in recent years. Nominal interest rates have declined dramatically from their peak in 1981. More important, expected real interest rates (based on nominal yields of short-term Treasury bills and the Livingston survey of inflationary expectations) have declined to 2 1/2% in 1986 from about 4 1/2% in 1982, which is the period in which budget deficits were excessive. (These are short-term rates). Unfortunately, nobody knows how to get reasonable estimates of long-term expected real interest rates in the U.S. However, long-term real interest rates on British indexed bonds have declined since 1984.) Given this evidence, I find it remarkable that most economists, not to mention journalists and government officials, still believe budget deficits raise interest rates. Copyright Dow Jones & Company Inc Jan 16, 1987
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Budget Deficits Only a Minor Crisis_Barro_WSJ_01-16-1987 -...

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