Large Deficits, Individual Welfare, and Private Saving

Abstract

A more simple explanation is provided here for a deficit-aggregate demand negative trade-off. Postwar deficits apparently have not produced high aggregate demand. It has been suggested that a parallel rise in private saving, following intergenerational altruistic transfer motives and accurate foresight of future tax liabilities, was capable of fully offsetting due changes in aggregate demand. Looking at relevant political information, the explanation provided in this paper regards the rise in private saving as an automatic welfare improvement consequence rather than a complicated intergenerational transfer calculation. When employed, the present explanation allows the relaxation of the above two strong assumptions concerning the rise in private saving. Both the public and the administrations have had no economic incentive to reduce the deficit or to freeze it at existing levels. Budgetary expansion is accompanied by improved welfare, thus, deficit reduction proves politically unwise for both Democrats and Republicans even with their different economic targets.