The effects of fiscal policy on the economy have received substantial attention in academic
and policy circles. We review this literature in light of recent policy debates and new research and
obtain three results. First, other things equal, deficits reduce national saving and future national
income, even if international capital inflows avert an increase in interest rates. Second, the recent
fiscal deterioration implies significant declines in future national income. Third, studies
incorporating the best available information about expected future deficits tend to find significant
effects of expected deficits on current long-term bond yields, controlling for other factors.