Expenditure and deficit policy: An analysis of the William E. Simon's rules

Abstract

In a speech before the Mont Pelerin Society, William E. Simon recommended that the U.S. government adopt five rules to achieve stability and economic growth. Two of these rules deal with the budget posture. The rules were based upon Simon's belief that excessive government spending and recurring federal budget deficits significantly contributed to the economic instabilities of the 1970s and 1980s, namely, high inflation, high unemployment, and decreasing rates of production and private capital accumulation. This paper seeks to explore the extent to which fiscal action in these two decades had departed from Simon's recommendations and presents evidence on the link between federal budget deficits and economic growth. “The proposals to limit spending and balance the budget are sometimes discussed as alternatives, but in my mind, they are not.” William E. Simon. Speech before the Mont Pelerin Society. Hoover Institution, 1980, p. 30.