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U.S. Government Deficits and Debt Amid the Great Recession: What the Evidence Shows

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  • Robert Pollin

Abstract

This paper examines three sets of major issues regarding the current U.S. government’s fiscal deficit and outstanding debt, tied to the 2009 economic stimulus program, the American Recovery and Reinvest-ment Act (ARRA). First, I consider the claim that high levels of government borrowing drives up interest rates. These high rates then produce a heavy burden of government debt as well as heavy inflationary pressures. The evidence we review regarding each of these concerns demonstrates that none have emerged as serious matters since the enactment of the ARRA. Given this conclusion, the paper then examines why the ARRA did not then succeed in generating a strong economic recovery. I first consider the possible impact of ‘Ricardian Equivalence,’—the position that government stimulus programs, by their nature, are self-defeating. After arguing against this position, I advance three reasons for the failure of the ARRA to achieve a strong recovery: 1) The ARRA relied too heavily on tax cuts as a means of bolstering private spending; 2) Household wealth declined dramatically during the recession, tied to the collapse of the financial bubble. This in turn weakened the willingness of households to increase spending; and 3) Credit markets were locked up, especially for smaller businesses, despite the highly expansionary monetary policy stance adopted by the Federal Reserve. Building on these findings, I finally develop a series of policy proposals aimed at promoting both a strong recovery in the short term and at reducing any remaining structural deficit issues in the longer term. The short-term program focuses on extending loan guarantees, especially to small businesses; and taxing the excess reserves held by commercial banks. The longer-term agenda focuses on reducing government costs for health care and the military, and on increasing revenue through establishing taxes on financial market transactions. >> Download the article as published in the Cambridge Journal of Economics

Suggested Citation

  • Robert Pollin, 2011. "U.S. Government Deficits and Debt Amid the Great Recession: What the Evidence Shows," Working Papers wp263, Political Economy Research Institute, University of Massachusetts at Amherst.
    • Handle: RePEc:uma:periwp:wp263
    as

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    File URL: https://per.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP263.pdf
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    References listed on IDEAS

    as
    1. Congressional Budget Office, 2010. "The Long-Term Budget Outlook," Reports 21546, Congressional Budget Office.
    2. Robert Pollin, 2010. "Austerity Is Not a Solution," Challenge, Taylor & Francis Journals, vol. 53(6), pages 6-36.
    3. Barro, Robert J, 1981. "Output Effects of Government Purchases," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1086-1121, December.
    4. Robert Pollin & James Heintz & Heidi Garrett-Peltier, 2009. "How Infrastructure Investments Support the U.S. Economy," Published Studies peri_infrastructure_inves, Political Economy Research Institute, University of Massachusetts at Amherst.
    5. Mr. Jaewoo Lee & Mr. Douglas Laxton & Mr. Michael Kumhof & Charles Freedman, 2009. "The Case for Global Fiscal Stimulus," IMF Staff Position Notes 2009/003, International Monetary Fund.
    6. Robert Pollin & Dean Baker & Marc Schaberg, 2003. "Securities Transaction Taxes for U.S. Financial Markets," Eastern Economic Journal, Eastern Economic Association, vol. 29(4), pages 527-558, Fall.
    7. repec:cbo:report:215461 is not listed on IDEAS
    8. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
    9. Barro Robert J, 2009. "Demand Side Voodoo Economics," The Economists' Voice, De Gruyter, vol. 6(2), pages 1-4, February.
    10. Lawrance L. Evans Jr., 2003. "Why the Bubble Burst," Books, Edward Elgar Publishing, number 2808, March.
    11. Robert Pollin, 2010. "Austerity is Not a Solution: Why the Deficit Hawks are Wrong," Working Papers wp235, Political Economy Research Institute, University of Massachusetts at Amherst.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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