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Concepts and Measures of Federal Deficits and Debt and Their Impact on Economic Activity

  • Michael J. Boskin
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    This paper introduces extensions of the National Income Accounts to include a consistent treatment of consumer durables and government capital in the measurement of consumption and income, and explicitly tests alternative propositions concerning the effects of government financial policy on real economic activity. The paper discusses adjustments to various measures of the budget deficit, national debt, or government "net worth". These include separating government tangible investment from consumption, accounting for government financial assets, inflation adjustments, etc. The most important results estimate consumption functions in which government consumption is subtracted from income. I take this to be more in the spirit of the Ricardian equivalence hypothesis, asking: Given the level of government consumption, would a shift from tax to debt finance alter consumption? The various measures of the deficit produce virtually identical results in their impact on consumption: a tax cut holding government consumption constant, unambiguously increases consumption substantially, about 40 cents on the dollar. Estimating separate coefficients on private wealth, net of government bonds and on private holdings of government bonds, yields a coefficient on government bonds virtually identical to that of regular private wealth, rather than zero as would be the case under Ricardian equivalence. The estimates of the net impact of Social Security wealth are consistent with recent research suggesting that the propensity to consume out of Social Security wealth is about half that of regular private wealth. The estimated impact of changes in net government explicit assets -- the value of government tangible capital over and above regular debt -- again is quite similar to the propensity to consume out of private wealth. This would suggest that government tangible assets substitute for private saving. Reduced form estimates are presented on the impact of federal deficits on the composition of GNP. Various specifications lead to the conclusion that a $1 increase in the deficit, controlling for the level of economic activity, appear to be associated with about a 30 cent increase in private saving, about a 35 cent decrease in domestic investment and about a 25 cent decrease in net foreign investment. Thus, the results reported in the paper, using alternative concepts and measures of deficits and debt tend to confirm the proposition that government deficits affect real economic activity.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2332.

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    Date of creation: Aug 1987
    Date of revision:
    Publication status: published as Economics of Public Debt, Arrow, K. and M. Boskin, eds.: MacMillan for the International Economic Association, 1988.
    Handle: RePEc:nbr:nberwo:2332
    Note: PE
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    1. Michael R. Darby, 1977. "The Effects of Social Security on Income and the Capital Stock," UCLA Economics Working Papers 095A, UCLA Department of Economics.
    2. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    3. Michael D. Hurd, 1986. "Savings and Bequests," NBER Working Papers 1826, National Bureau of Economic Research, Inc.
    4. Hurd, Michael D & Boskin, Michael J, 1984. "The Effect of Social Security on Retirement in the Early 1970s," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 767-90, November.
    5. Martin Feldstein & Anthony J. Pellechio, 1980. "Social Security and Household Wealth Accumulation: New Microeconomic Evidence," NBER Working Papers 0206, National Bureau of Economic Research, Inc.
    6. Eisner, Robert & Pieper, Paul J, 1986. "A New View of the Federal Debt and Budget Deficits: Reply," American Economic Review, American Economic Association, vol. 76(5), pages 1156-57, December.
    7. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    8. Michael J. Boskin & Laurence J. Kotlikoff & Douglas J. Puffert & John B. Shoven, 1986. "Social Security: A Financial Appraisal Across and Within Generations," NBER Working Papers 1891, National Bureau of Economic Research, Inc.
    9. Lawrence H. Summers, 1985. "Issues in National Savings Policy," NBER Working Papers 1710, National Bureau of Economic Research, Inc.
    10. Tanner, J Ernest, 1979. "Fiscal Policy and Consumer Behavior," The Review of Economics and Statistics, MIT Press, vol. 61(2), pages 317-21, May.
    11. Mirer, Thad W, 1979. "The Wealth-Age Relation among the Aged," American Economic Review, American Economic Association, vol. 69(3), pages 435-43, June.
    12. Miller, Marcus, 1982. "Inflation-Adjusting the Public Sector Financial Deficit : Measurement and Implications for Policy," The Warwick Economics Research Paper Series (TWERPS) 209, University of Warwick, Department of Economics.
    13. Joseph E. Stiglitz, 1983. "On the Relevance or Irrelevance of Public Financial Policy," NBER Working Papers 1057, National Bureau of Economic Research, Inc.
    14. Alan S. Blinder & Roger H. Gordon & Donald E. Wise, 1981. "Social Security, Bequests, and the Life Cycle Theory of Saving: Cross-Sectional Tests," NBER Working Papers 0619, National Bureau of Economic Research, Inc.
    15. King, M A & Dicks-Mireaux, L-D L, 1982. "Asset Holdings and the Life-Cycle," Economic Journal, Royal Economic Society, vol. 92(366), pages 247-67, June.
    16. Leimer, Dean R & Lesnoy, Selig D, 1982. "Social Security and Private Saving: New Time-Series Evidence," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 606-29, June.
    17. Michael J. Boskin, 1987. "Future Social Security Financing Alternatives and National Saving," NBER Working Papers 2256, National Bureau of Economic Research, Inc.
    18. E. Philip Howrey & Saul H. Hymans, 1978. "The Measurement and Determination of Loanable-Funds Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 655-685.
    19. Mervyn A. King & Louis Dicks-Mireaux, 1981. "Asset Holdings and the Life Cycle," NBER Working Papers 0614, National Bureau of Economic Research, Inc.
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