US government deficits and debt amid the great recession: what the evidence shows

摘要

This paper examines three sets of major questions regarding the current US government's fiscal deficit and outstanding debt, tied to the 2009 economic stimulus programme, the American Recovery and Reinvestment Act (ARRA). First, I consider the claim that high levels of government borrowing drive up interest rates. These high rates then produce a heavy burden of government debt as well as heavy inflationary pressures. The evidence reviewed 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 questions why the ARRA did not then succeed in generating a strong economic recovery. I advance three primary reasons for the failure of the ARRA to achieve a strong recovery: (ⅰ) the ARRA relied too heavily on tax cuts as a means of bolstering private spending; (ⅱ) household wealth declined dramatically during the recession, tied to the collapse of the financial bubble, and this in turn weakened the willingness of households to increase spending; and (ⅲ) 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 then 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 programme 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.