Twin Deficits and Sustainability
In the mid to late 1980s, the U.S. economy simultaneously producedÑfor the first time in the postwar periodÑhuge federal budget deficits as well as large current account deficits, together known as the Òtwin deficitsÓ (Blecker 1992; Rock1991). This generated much debate and hand-wringing, most of which focused on supposed Òcrowding-outÓ effects (Wray 1989). Many claimed that the budgetdeficit was soaking up private saving, leaving too little for domestic investment, and that the ÒtwinÓ current account deficit was soaking up foreign saving. The result would be higher interest rates and thus lower economic growth, as domestic spendingÑespecially on business investment and real estate construction was depressed. Further, the government debt and foreign debt would burden future generations of Americans, who would have to make interest payments and eventually retire the debt. The promulgated solution was to promote domestic saving by cutting federal government spending and private consumption (Rock 1991; Council of Economic Advisers 2006). Many pointed to JapanÕs high personal saving rates as a model of the proper way to run an economy.
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- John F. Henry & L. Randall Wray, 1998.
- John F. Henry & L. Randall Wray, 1998. "Economic Time," Economics Working Paper Archive wp_255, Levy Economics Institute.
- Wynne Godley, 1996. "Money, Finance and National Income Determination: An Integrated Approach," Economics Working Paper Archive wp_167, Levy Economics Institute. Full references (including those not matched with items on IDEAS)
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