Economists are often
tempted to use GNP as a shorthand measure of economic well-being. Budget
deficits do not affect GNP initially and, in the long run, reduce GNP. Thus, by
the measure of GNP, deficits are unambiguously harmful. Yet this analysis of
deficits is misleading, for economic will being depends on consumption rather
than GNP. While deficits do not raise GNP, they do raise consumption in the
short run by lowering household’s tax burden. If one focuses on consumption as the
proper measure of well being, budget deficits come to look like a particular
policy of income redistribution. Redistributions occur because of the change in
the timing in taxes and because of changes in factor prices. These
redistributions do not harm
Like any shift in tax burden,
deficits have general equilibrium effects. The key effects follow from the
crowding out of capital. The falling capital stock affects factor prices: wage
fall, harming workers and the returns on capital rise, benefiting capital
owners.
Thus, the winners from budget
deficits are current taxpayers and future owners of capital, while the losers
are future taxpayers and future workers. Because these gains and losses
balance, a policy of running budget deficits cannot be judged by appealing to
the Pareto criterion or other notion of economic efficiency. Instead, the key
issue is whether we approach of the direction of the redistribution that this
policy implies.
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