The Deficit Is Not a Well-Defined Measure of Fiscal Policy

Abstract

Notwithstanding its widespread use, the government's deficit is not a well-defined measure of fiscal policy from the perspective of neoclassical economics; the equations of neoclassical models do not define the deficit. Rather than being a fundamental economic concept, the deficit is an arbitrary cash flow accounting construct with no necessary relation to the true stance of fiscal policy. Although the deficit is supposed to indicate how the burden of paying for the government's consumption is spread across different generations, actual changes in the measured deficit in the United States have had little if any relation to changes in the burden imposed by the government on different generations. The deficit's lack of definition is illustrated with a simple model, and the potential for misreading fiscal policy is discussed with U.S. fiscal policy in the 1980s as an example. In this article, creation of present value generational accounts are called for that would properly measure the intergenerational stance of fiscal policy.