Deficit Follies

Johannes Brumm, Xiangyu Feng, Laurence Kotlikoff and Felix Kubler

No 28952, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Deficit finance is free when the growth rate routinely exceeds the government's borrowing rate. Or so many people say. This note presents three counterexamples. Each features a simple OLG economy with a zero growth rate and a negative government borrowing rate. None provides a basis for taking from the young and giving to the old. One example features idiosyncratic risk, one features policy uncertainty, and one features a safe borrowing rate that exceeds the safe lending rate. Progressive taxation cures the first problem. Policy resolution cures the second. And improved intermediation, perhaps organized by the government, cures the third. The three models are parables. Each conveys an inconvenient truth. Seemingly free deficits may, on careful inspection, be far more costly than they appear. Indeed, government intergenerational redistribution can lower the government borrowing rate, encouraging yet more inefficient deficit finance.

JEL-codes: E21 E6 H6 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-dge and nep-mac
Note: EFG PE
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