>

Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Lecture Thirty Two

Effects of the Deficit
(Economics 100b; Spring 1996)

Professor of Economics J. Bradford DeLong
601 Evans, University of California at Berkeley
Berkeley, CA 94720
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net

April 26, 1996


Administration
Short Run Effects
Long Run Effects
Very Long Run Effects
Static Supply Side Effects
"Ricardian Equivalence"


Administration



Short Run Effects

First, short-term closed-economy Keynesian (if not offset by monetary policy); IS-LM; stimulus--but we think that effects of everything not automatic stabilizers are offset by monetary policy in the context of today's Federal Reserve.



Long Run Effects

Second, closed-economy long-run (chapter 3): investment down, government spending and consumption up...

Third, small open-economy long-run (chapter 7): borrowing from abroad up; trade deficit; investment stays high; loss of institutional capital in traded-goods industries; growing gap between GDP and GNP.

Fourth, very long run. Solow growth model, national savings and investment share down; steady-state capital-output ratio down. A less capital intensive economy... A lower level of consumption and output in the long run...


Supply-Side Effects of a Large National Debt

A drag on U.S. productivity through higher tax rates... 60% of GDP x 2.5% real interest rate means that 1.5% of U.S. real GDP is taxed just to be transferred.

What does it mean that the federal government has to collect an extra 1.5% of GDP in taxes--has to raise taxes from, say, 20% of GDP (needed to pay for government programs) to 21.5% of GDP?



"Ricardian" Equivalence

(a) I'm not sure why this section is in the book (maybe because Robert Barro, its major exponent, is down the hall from Greg Mankiw). Barro seems to think that a tax cut (unaccompanied by a spending cut) would lead to an increase in savings because people would say "Hmmm... Look at all this spending. At some point they are going to have to tax to pay for it.... I had better save more", and thus that national savings should be invariant to the government budget deficit because private savings rises when the government deficit rises.

There are a lot of holes in this argument:

(b) I've seen a lot of Barro on this topic:

So what I want to ask Greg is: "How many strikes does Barro get before you declare him 'out', and pull section 16.2 from the textbook?"


>

Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/