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Principles of Economics- Mankiw (5th) 554

Principles of Economics- Mankiw (5th) 554 - 572 PA R T N I...

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572 PART NINE THE REAL ECONOMY IN THE LONG RUN CASE STUDY THE DEBATE OVER THE BUDGET SURPLUS Our analysis shows why, other things being the same, budget surpluses are bet- ter for economic growth than budget deficits. Making economic policy, how- ever, is not as simple as this observation may make it sound. A good example occurred in the late 1990s, when the U.S. government found itself with a budget surplus, and much debate centered on what to do with it. Many policymakers favored leaving the budget surplus alone, rather than dissipating it with a spending increase or tax cut. They based their conclusion on the analysis we have just seen: Using the surplus to retire some of the gov- ernment debt would stimulate private investment and economic growth. Other policymakers took a different view. Some thought the surplus should be used to increase government spending on infrastructure and education be- cause, they argued, the return to these public investments is greater than the typical return to private investment. Some thought taxes should be cut, arguing
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