How Real Is the Federal Deficit? by Robert Eisner

Author:Robert Eisner
Language: eng
Format: epub
Publisher: The Free Press

TABLE 9.5 High-Employment Budgets, Price Effects, Delayed Interest Effects, and Changes in Monetary Base and GNP

TABLE 9.6 High-Employment Budgets, Interest Effects, and Changes in Monetary Base and Unemployment

TABLE 9.7 High-Employment Budgets, Price Effects, Delayed Interest Effects, and Changes in Monetary Base and Unemployment

But now, what about the composition of gross national product? What is the evidence on crowding out of investment and on exports and imports, recognizing that the effects of the budget deficit and changes in the monetary base on GNP are the sum of their effects, direct or indirect, on the various components of GNP. 5 From regressions of these components, shown in Tables 9.8 and 9.9, we note first, in equations (9.28) and (9.29) that the price-adjusted high-employment surplus is significantly and negatively related to both consumption and investment. Deficits appeared to “crowd in” not “crowd out” investment.

And most interestingly, the surplus coefficient is significantly positive in the net exports equation. This indicates that the greater the adjusted budget deficit, the greater are subsequent imports and⁄or the less are subsequent exports. The positive effect of the deficit on imports (negative effect of the surplus) is confirmed in equation (9.41) of Table 9.9.

We may presume that greater adjusted high-employment deficits, by bringing about a greater gross national product and national income, bring about greater expenditures on foreign goods. To the extent that the deficit induces an inflow of foreign capital it may also contribute to raising the international value of the dollar. This, too, encourages imports and may, as well, discourage U.S. exports.

There are two important consequences, one domestic and one foreign, of this negative effect of our budget deficits on net exports. On the domestic side, we have a “leakage” of income and demand outside of our economy. We see in equation (9.33) of Table 9.8 that each percentage point of price-adjusted highemployment deficit was associated with an increase in “domestic demand” equal to 2.1 percent of GNP. It was also associated, however, with a reduction in net exports equal to 0.4 percent of output; the estimated impact of one percentage point of deficit on subsequent GNP is only 1.6 percent. We find then that the deficit leads Americans to spend more and that stimulates more production, but some of it involves Japanese Toyotas and Sonys, French wines, and English sweaters.

But if this “leakage” reduces the favorable impact of budget deficits on our own output, it correspondingly contributes to the demand for foreign products. With our gross national product in the neighborhood of $4,000 billion, each percentage point of deficit, according to equation (9.41), contributes to an increase in demand for foreign goods and services of $18 billion (0.457 percent of $4,000 billion). We should then anticipate a role for the U.S. budget deficit in the economies of other nations. The lesser increase in domestic output will have a counterpart in greater growth of output elsewhere, as we shall shortly confirm with some striking new evidence.

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