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Learning From the Reagan Deficits

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  • Benjamin M. Friedman
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    Abstract

    This paper draws six observations from the U.S. fiscal policy actions of the 1980s and their apparent macroeconomic aftermath. in each case focusing on implications for familiar debates about economic behavior: (1) Across-the-board cuts in personal income tax rates reduced the government's tax revenues. (2) Reducing tax revenues did not restrain government spending, at least not by enough to avoid the emergence of historically large deficits. (3) Greater government deficits did not result in greater private saving. (4) Greater deficits did result in -- or at least coincide with -- higher real interest rates. (5) Greater deficits did result in reduced private investment (6) Greater deficits also resulted in lower net foreign investment.

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    File URL: http://www.nber.org/papers/w4022.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4022.

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    Date of creation: Mar 1992
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    Publication status: published as The American Economic Review, Vol. 82, No. 2, pp. 299-304, (May 1992).
    Handle: RePEc:nbr:nberwo:4022

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    1. Orley Ashenfelter & James Heckman, 1971. "The Estimation of Income and Substitution Effects in a Model of Family Labor Supply," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 402, Princeton University, Department of Economics, Industrial Relations Section..
    2. B. Douglas Bernheim, 1988. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Working Papers 2330, National Bureau of Economic Research, Inc.
    3. Benjamin M. Friedman, 1978. "Crowding Out or Crowding In? Economic Consequences of Financing Government Deficits," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 593-641.
    4. Lawrence Summers & Chris Carroll, 1987. "Why Is U.S. National Saving So Low?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 607-642.
    5. Eisner, Robert & Pieper, Paul J, 1986. "A New View of the Federal Debt and Budget Deficits: Reply," American Economic Review, American Economic Association, American Economic Association, vol. 76(5), pages 1156-57, December.
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    Cited by:
    1. Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier.
    2. Jeffrey R. Campbell & Zvi Hercowitz, 2006. "Welfare implications of the transition to high household debt," Working Paper Series, Federal Reserve Bank of Chicago WP-06-27, Federal Reserve Bank of Chicago.
    3. Jeffrey R. Campbell & Zvi Hercowitz, 2006. "The macroeconomic transition to high household debt," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Nov.
    4. Jeffrey R. Campbell & Zvi Hercowitz, 2010. "Interest rates following financial re-regulation," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q I, pages 2-13.
    5. Selahattin Dibooglu & Faik Koray, 2001. "The Behavior of the Real Exchange Rate Under Fixed and Floating Exchange Rate Regimes," Open Economies Review, Springer, Springer, vol. 12(2), pages 123-143, April.
    6. Uhlig, H.F.H.V.S., 1997. "Capital Income Taxation and the Sustainability of Permanent Primary Deficits," Discussion Paper, Tilburg University, Center for Economic Research 1997-11, Tilburg University, Center for Economic Research.
    7. Dibooglu, Selahattin, 1996. "Real disturbances, relative prices and purchasing power parity," Journal of Macroeconomics, Elsevier, Elsevier, vol. 18(1), pages 69-87.
    8. Koumparoulis, Dimitrios, 2006. "Ευρωπαϊκή Δημοσιονομική Πολιτική Και Οικονομική Μεγέθυνση: Η Νεοκλασική Οικονομική Θεωρία Για Την ΠερίπτωσÎ," MPRA Paper 44310, University Library of Munich, Germany.

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