The last two years have seen a sizable reversal in the federal budget, from solid surpluses to budget deficits. Some have expressed concern that the deficits will reduce national saving and future national income and put pressure on long-term interest rates. The Bush administration, however, has rejected these concerns. Glenn Hubbard, chairman of the Council of Economic Advisers, has stated that there is “no evidence” that deficits affect interest rates.
A new Brookings study re-examines these issues. The study finds widespread support for the view that lack of fiscal discipline hurts prospects for future national income and raises current interest rates. The study shows that a careful review of recent evidence, previous research, several major macro-econometric models, and the views of leading economists and policymakers lead to the same conclusion.
The study, written by Brookings senior fellows William Gale and Peter Orszag, is titled “The Economic Effects of Long-Term Fiscal Discipline” and will be distributed and discussed at this forum.
This press briefing at Brookings is being hosted in conjunction with the Urban Institute-Brookings Institution Tax Policy Center.