Thursday, February 13, 2003

Do deficits restrict spending?

I took Brad DeLong to task for treating 50 year budget protections seriously (his reply here) and argued, as many do, that deficits are the only politically feasible way to cut spending, and that no, one does not need to be a baby-eating monster to think lower government spending is good.

Jane Galt has a super post on what the data says about expenditure vis a vis budget, and finds that it seems it have a small impact on interest rates. This makes sense because larger deficits require higher government borrowing and also reduce the likelihood of default, and while the US is no Argentina, you would expect this to feed (gently) into interest rates. Higher interest rates make borrowing more expensive, which increases the incentive to cut spending.


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