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

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  • Robert Pollin
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    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

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    Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp263.

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    Date of creation: 2011
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    Handle: RePEc:uma:periwp:wp263

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    1. 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.
    2. 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.
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