CHAPTER 7

Deficit Spending

One of the most contentious issues that arise in debating macroeconomic policy is the effect of deficits on the economy. We have seen Alan Blinder’s argument that deficits are helpful in times of economic contraction but potentially harmful in times of full employment. Deficits, he argues, are helpful when the economy is operating below its long-run normal level because they expand aggregate demand and with it, employment. Deficits are not helpful when the economy is operating at full employment, however. At that point, deficits hurt the economy by raising interest rates and crowding out investment. This is the policy problem as economists of a liberal persuasion see it.

There is another view of the problem associated ...

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