Analysis: Deficit Spending Is Deeply Harmful To Long-Term Economic Growth

A new analysis reveals that long-term economic growth in the United States is significantly dampened by federal deficit spending.

Economists from Penn Wharton Budget Model — a project of the University of Pennsylvania’s Wharton School that evaluates public policy proposals — released an interactive tool that permits users to observe the effects of deficit spending on the American economy.

Under deficit-financed spending proposals of $100 billion, $1 trillion, and $10 trillion, the American economy contracts in the long-term — a reality explained by the “crowding out effect.”

As Penn Wharton Budget Model says of debt that funds public spending:

The government collects real resources via voluntary transactions with economic agents who are willing to trade real resources today for the promise of real resources in the future. Debt buyers, including U.S. households saving for retirement, view this debt as savings, which reduces their savings in private investment. This substitution is called the ‘capital crowding-out effect’ from government debt issuance.

Across the globe, policymakers and central bankers often point to near-zero interest rates as justification for borrowing money — whether for infrastructure, social welfare, or other government programs. However, the economists point out that long-term growth is still a salient cost:

With low government borrowing rates, it might seem that government borrowing would have little cost. However, when projecting expected (likely) future outcomes due to large deficits, the economy’s return to private capital investment must also be accounted, which is larger than the government borrowing rate.

Penn Wharton Budget Model’s simulation shows that nonproductive government spending in a partially-reopened country worsens economic prospects for decades.

For instance, $100 billion in new deficit spending cuts economic output by 0.02% before the year 2050 while increasing government debt by 0.25%. For larger packages, the effect is far more noticeable. With $1 trillion in deficit spending, output falls by 0.28% and debt rises by 2.53% within three decades; with a $10 trillion expenditure, output falls by 3.09% and government debt rises by 27.24%.

The effect of deficit spending on the capital stock — the amount of productive assets used to produce goods and services — is especially severe. With $1 trillion in deficit spending, capital stock falls 0.78% by 2050; with $10 trillion in spending, capital stock falls by 8.59%.

As the Biden administration considers several multitrillion-dollar policy proposals — including the American Jobs Plan, the American Families Plan, and the already-passed American Rescue Plan — Penn Wharton Budget Model’s report is particularly relevant to Americans. Although government officials see low interest rates as a signal to pursue massive new spending programs, later generations may end up footing the bill.

The views expressed in this piece are the author’s own and do not necessarily represent those of The Daily Wire.

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