Learning From the Reagan Deficits
This paper draws six observations from the U.S. fiscal policy actions of the 1980s and their apparent macroeconomic aftermath. in each case focusing on implications for familiar debates about economic behavior: (1) Across-the-board cuts in personal income tax rates reduced the government's tax revenues. (2) Reducing tax revenues did not restrain government spending, at least not by enough to avoid the emergence of historically large deficits. (3) Greater government deficits did not result in greater private saving. (4) Greater deficits did result in -- or at least coincide with -- higher real interest rates. (5) Greater deficits did result in reduced private investment (6) Greater deficits also resulted in lower net foreign investment.
Published: The American Economic Review, Vol. 82, No. 2, pp. 299-304, (May 1992).