January 2012 special supplemental issue contents
Consequences of Government Deficitsand Debt

by Glenn Hubbard
Columbia University and NBER


Over many years, Ben Friedman's economic research and writings in political economy frame economic analysis of- and moral consideration of-large government budget deficits and the need for fiscal consolidation in the United States. In his book The Moral Consequences of Economic Growth, Friedman emphasizes the salutary effects economic growth for openness and social cohesion. This essay emphasizes economic analysis of government budget deficits. The U.S. economy did not, in many respects, flounder after the budget deficits of the 1980s. Indeed, by the middle of the 1990s, the U.S. economy began a long-lasting expansion in productivity growth. While direct crowding out of private investment through higher real interest rates has, at least in the view of the empirical evidence reviewed in this essay, been modest, three concerns remain. The first is that cumulative increases in debt are now so large that even the small estimated effects identified here can lead to large increases in real interest rates. The second is that one attenuation of effects of higher government debt levels on interest rates may trace to greater reliance on foreign saving, with an accompanying problem of imbalances. The third is that the present trajectory of government spending in the United States presents the very real possibility of higher tax burdens, reducing capital formation, economic growth, and living standards.

JEL Code: H6.

Full article (PDF, 33 pages 320 kb)
Discussion by Alberto Alesina