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Does Fiscal Stimulus Cause Too Much Debt?

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Abstract

This study distinguishes between temporary fiscal stimulus to combat a recession and two other debt-raising policies: financial bailouts and spending on Medicare, Medicaid, and Social Security. Two striking conclusions emerge from our simulations of the impact of a temporary fiscal stimulus on the economy. First, the fiscal stimulus effectively mitigates the recession. Second, debt as a percentage of GDP is only slightly greater with the fiscal stimulus than it would be without the stimulus.

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Notes

  1. Go to http://fairmodel.econ.yale.edu/main2.htm and click “Macroeconometrics.” Also, see Fair [2004].

  2. This numerical property as well as other aspects of the Fair model are discussed in Seidman and Lewis [2002, pp. 251–284]; Seidman [2003]; Seidman and Lewis [2006, pp. 30–39]; and Lewis and Seidman [2008, pp. 751–760].

  3. Go to http://fairmodel.econ.yale.edu/main2.htm and click “Macroeconometrics.”

  4. Fair based his stimulus simulation on the Congressional Budget Office report of March 2, which analyzed the fiscal stimulus law enacted on February 17.

  5. Under the no-stimulus path, the short-term interest rate is zero from 2009.2 through 2010.3.

  6. The Federal Reserve keeps the rate zero from 2009.2 through 2010.3.

References

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  • Fair, Ray . 2009. http://fairmodel.econ.yale.edu/main2.htm.

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  • Seidman, Laurence . 2003. Automatic Fiscal Policies to Combat Recessions. M.E. Sharpe, Armonk, NY.

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  • Seidman, Laurence, and Lewis, Kenneth . 2002. “A New Design for Automatic Fiscal Policy.” International Finance, 5 (2): 251–284.

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Acknowledgements

We are extremely grateful to Professor Ray Fair of Yale University for continually updating and providing access to his macroeconometric model.

Authors

Additional information

*Laurence S. Seidman is Chaplin Tyler Professor of Economics at the University of Delaware. He has published many articles and several books on macroeconomic policy issues. He received his Ph.D. in economics from the University of California-Berkeley and his B.A. from Harvard. Kenneth A. Lewis is Chaplin Tyler Professor of Economics and Director of the Graduate Program at the University of Delaware. He has published many articles on macroeconomic policy issues. He is Chairman of the Revenue Forecasting Subcommittee of the Delaware Economic and Financial Advisory Council. He received his Ph.D. in Economics from Princeton University and his B.A. from Amherst.

Appendix

Appendix

Calculation of Federal Debt

Table 4 assumes that each quarter the debt increases by an amount equal to the quarterly deficit. The Fair model does not make this assumption. It obtains data on federal debt from one source and data on the quarterly deficit from another source. In many quarters, there is a significant discrepancy between the reported deficit and the reported increase in the debt. In its projections, the Fair model assumes that the magnitude of the discrepancy in each future quarter equals the magnitude of the discrepancy in the most recent historical quarter. Also, the Fair model takes account of other reasons why the increase in debt differs from the deficit—for example, financing a small portion of the deficit with high-powered money rather than selling debt to the public.

With the Fair model's measure of debt in 2010.3 in Table 4, debt with no stimulus would be $7,447 billion (instead of $7,327 billion), and with stimulus, $8,336 billion (instead of $8,234 billion), so debt as a percent of GDP with no stimulus would be 52.9 percent (instead of 52.1 percent) and with stimulus, 54.4 percent (instead of 53.7 percent), so the difference in 2010.3 would be 1.5 percentage points (instead of 1.6 percentage points). Thus, the headline would still apply: debt as a percentage of GDP is only 2 percentage points greater with the stimulus than with no stimulus.

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Seidman, L., Lewis, K. Does Fiscal Stimulus Cause Too Much Debt?. Bus Econ 44, 201–205 (2009). https://doi.org/10.1057/be.2009.24

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