[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

investment increases the capital stock, thereby increasing potential GDP in
the future.
Evaluating Government Deficits
and Surpluses
We have seen that government deficits and surpluses have significant impacts.
Deficits reduce national saving, increase the real interest rate, and reduce investment,
and surpluses have the opposite effect. But while our analysis tells us what the
consequences of deficits and surpluses are, it does not tell us whether governments
should or should not run deficits.
Economists have traditionally argued that government borrowing, just like individual
borrowing, may or may not make sense, depending on the purpose for which
the funds have been borrowed. It makes sense to borrow to buy a house that you
will live in for many years or a car that you will drive for several years. Borrowing
is a way to spread the payments for the house or the car over time, so that you can
pay for the purchase as you use it. It also makes sense to borrow for an educational
degree that will lead to a higher-paying job in the future. But paying this year for a
vacation from two years ago makes no economic sense.
Countries are in a similar position. Borrowing to finance a road or a school that
will be used for many years may be quite appropriate; borrowing to pay for this
year’s government salaries or current operating costs poses real problems.
Governments in many countries—sometimes the dictators or corrupt regimes of
the past—have taken on more debt than they can comfortably pay off, forcing them
to raise taxes sharply and reduce citizens’ living standards. Others have simply
failed to repay what they owe, thereby jeopardizing their ability to borrow in
the future.
Financing government expenditures by borrowing rather than by raising taxes—
deficit financing—results in higher levels of private consumption in the short run, since
individuals’ taxes are lower. Thus, borrowing to finance government expenditures
can serve to shift the burden onto future generations. For example, the U.S. government
financed some of its World War II expenditures by borrowing rather than raising
taxes by the full amount necessary to cover the war effort. This debt was
discharged, in part, by taxes paid by workers long after the war ended. Thus, some
of the cost of the war was borne by the generation who entered the labor force after
the war. Since these later generations benefited from the Allied victory in World
War II, an argument can be made in this case that sharing the burden across
generations made sense. If governments borrow for spending that benefits only
the current generation, however, forcing future generations to share the cost is
less defensible.
There is another way that government borrowing shifts the burden of expenditures
onto future generations. When the economy is at full employment, more consumption
implies less saving. To maintain the economy at full employment, the real
interest rate must rise to balance saving and investment—and a higher equilibrium
EVALUATING GOVERNMENT DEFICITS AND SURPLUSES ∂ 557