574 PART NINE THE REAL ECONOMY IN THE LONG RUN substantially to pay for soldiers and military equipment. Taxes typically rise as well but by much less than the increase in spending. The result is a budget deficit and increasing government debt. When the war is over, government spending declines, and the debt–GDP ratio starts declining as well. There are two reasons to believe that debt financing of war is an appro-priate policy. First, it allows the government to keep tax rates smooth over time. Without debt financing, tax rates would have to rise sharply during wars, and as we saw in Chapter 8, this would cause a substantial decline in economic efficiency. Second, debt financing of wars shifts part of the cost of wars to fu-ture generations, who will have to pay off the government debt. This is argu-ably a fair distribution of the burden, for future generations get some of the benefit when one generation fights a war to defend the nation against foreign aggressors. One large increase in government debt that cannot be explained by war is
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.