Ricardo and Budget Deficits

Abstract

In recent years there has been a lot of discussion about US budget deficits. Many economists and other observers have viewed these deficits as harmful to the US and world economies. The supposed harmful effects, predicted by theories of the life-cycle type, include high real interest rates, low saving, low rates of economic growth, large current-account deficits in the United States and other countries with large budget deficits, and either a high or low dollar (depending apparently on the time period). On the other hand, this crisis scenario has been hard to maintain along with the robust performance of the US economy since late 1982. This performance features high average growth rates of real GNP, declining unemployment, much lower inflation than before, a sharp decrease in nominal interest rates and some decline in expected real interest rates, high values of real investment expenditures, and a dramatic boom in the stock market.