Macroeconomic Policy and the Twin Deficits

Abstract

Many people think that the pressing economic problems facing the United States can be cured by eliminating its twin deficits - the budget deficit and the trade deficit - via a more stringent fiscal policy. In my view, however, these twin deficits are not the problem. They are, instead, the levers that were used to extricate the industrialized world from the great economic depression of 1979–82. Hence, any deliberate attempt by the US government to initiate a ‘saving’ process via a tight fiscal policy will reverse the progress made in the 1980s - as the entire free world will, ceteris paribus, suffer from another great recession.