Commentary: What Do Budget Deficits Do?

The title of Ball and Mankiw's paper asks: What Do Budget Deficits Do? One answer to that question is a restatement on the pure theory of debt-financed budget deficits. An alternative answer would develop the effects on the U.S. or world economies on the assumption that the U.S. federal government balances its budget by reducing spending, instead of raising tax rates, or running deficits equal to 2 or 3 percent (or higher) of GDP. The alternative answer considers not only deficit reduction but the way in which deficit reduction is achieved and the effects on resource allocation.