Government Deficits And The Public Debt: The Endless Controversy

Abstract

No economic topic has attracted more attention during the 1980s than the size of Federal government budget deficits and the corresponding rapid rise in the public debt.  Crowding out news regarding Third World debt problems, U.S. foreign trade deficits, and the break up of American Telephone and Telegraph, Federal government budget deficits have been blamed for everything from high interest rates to the deterioration in the moral fiber of the American people.  Deficits and debt have also caused political reversal:  historically free spending Democrats blaming Reagan deficits for a variety of economic ills while the conservative Republican president treats the deficit with benign neglect. 

The purpose of this paper is not to answer all of the questions that have been raised regarding the causes and consequences of government deficits and debt.  The initial concern is instead with the facts and figures on the absolute and relative size of the Federal government’s recent deficits and debt.  Next certain measurement issues are addressed for there is a continuing debate regarding appropriate procedures for expressing the government’s budgetary outcomes.  The third and final section of the paper reviews some of the arguments, theoretical and empirical, on the relation between deficits and debt on the one hand and interest rates on the other.  In each section the intent is to survey rather than to present new theoretical arguments or new empirical evidence.