Will US confirm that nothing bad happens to indebted economies?
Impending tax cuts could prove the theory — or send the country into a macroeconomic mess
As the Republicans prepare for their big tax-reform push in the US, the issue of deficits and debt is once again coming to the fore. Many economists realise that tax cuts, especially income tax cuts, tend to increase deficits, which over time lead to increases in the national debt. If adopted, the plan would probably pump up deficits and debt. This is not the first time that has happened — Ronald Reagan and George W Bush also cut taxes and deficits swelled. So the question is, is more debt good, bad, or does it even matter? And if it’s bad, how serious a problem is it? The answer is that no one really knows. Like so many things in macroeconomics, there is no reliable, confirmed theory that tells us the effect of government deficits or debt. In the short term, the big question is whether deficits raise aggregate demand. Aggregate demand isn’t a well-defined concept, but it essentially means how much money people want to spend on all the goods and services in the economy. Government s...
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