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Friday, October 14, 2005
The Effects of Chronic, Large Deficits
The Congressional Budget Office released a report titled Long-Term Economic Effects of Chronically Large Federal Deficits yesterday. The report discusses how deficits affect national saving, financial markets, and capital inflows.
The report points out that while temporary deficits (such as those brought about by unanticipated spending for events such as Hurricane Katrina) can serve to support economic activity, large federal deficits (such as those created by chronic tax cutting) serve to reduce future living standards by "slowing the accumulation of national wealth as they lower national saving.... by shifting resources into public and private consumption through increases in federal spending cuts in federal taxes." The report also notes that policies which increase the deficit but also "provide incentives for people to work, acquire more skills and education, undertake research and development, invest, innovate, or use resources more efficiently may do less harm to future living standards than policies that increase the deficit without providing such incentives."
Posted by Becky Lewis
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