Costs Associated with Deficit Finance

Key benefits include the ability to spread out the payments for large government purchases and the opportunity to use deficits to stimulate economies in recession. The main cost of deficits is that they increase real interest rates, thus crowding out investment and slowing long-term growth. As we also saw, these effects might be tempered by an increase in household savings in response to government deficits. The evidence suggests that the Ricardian perspective on deficits has partial validity. Changes in government savings are likely to be partially, but not completely, offset by changes in households’ saving behavior. We also noted that a balanced-budget amendment would not absolve government of the difficult choices involved in balancing the budget. It is one thing to pass a law saying that the budget must be balanced. It is quite another to come up with the spending cuts and tax increases that are needed to make it happen. Meanwhile, time is passing. Go and look again at the size of the debt outstanding reported at the US Treasury (http://www.treasurydirect.gov/NP/BPDLogin?application=np). How much has it changed since you first checked it? How much has your share of the debt changed? Key Links  The Congressional Budget Office: http://www.cbo.gov  US Treasury calculation of the public debt: http://www.publicdebt.treas.gov  CIA World Factbook: https://www.cia.gov/library/publications/the-world-factbook  US national debt clock: http://www.brillig.com/debt_clock  Debate on balancing the budget:  Concord Coalition: http://www.concordcoalition.org/issues  Americans for a Balanced-Budget Amendment:http://www.balanceourbudget.com  Center on Budget and Policy