TY  - JOUR
AU  - Kotlikoff, Laurence J
TI  - From Deficit Delusion to the Fiscal Balance Rule:  Looking For an Economically Meaningful Way to Assess Fiscal Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2841
PY  - 1989
Y2  - February 1989
DO  - 10.3386/w2841
UR  - http://www.nber.org/papers/w2841
L1  - http://www.nber.org/papers/w2841.pdf
N1  - Author contact info:
Laurence J. Kotlikoff
Department of Economics
Boston University
270 Bay State Road
Boston, MA 02215
Tel: 617/353-4002
Fax: 617/353-4001
E-Mail: kotlikoff@gmail.com
M1  - published as Laurence J. Kotlikoff, Laurence J. Kotlikoff, Willi Leibfritz. "From Deficit Delusion to the Fiscal Balance Rule: Looking for an Economically Meaningful Way to Assess Fiscal Policy ," in Alan J. Auerbach, Laurence J. Kotlikoff and Willi Leibfritz, editors, "Generational Accounting around the World" University of Chicago Press (1999)

AB  - Notwithstanding its widespread use as a measure of fiscal policy, the government deficit is not a well-defined concept from the perspective of neoclassical macro economics. From the neoclassical perspective the deficit is an arbitrary accounting construct whose value depends on how the government chooses to label its receipts and payments. This paper demonstrates the arbitrary nature of government deficits. The argument that the deficit is not well-defined is first framed in a simple certainty model with nondistortionary policies, and then in settings with uncertain policy, distortionary policy, and liquidity constraints. As an alternative to economically arbitrary deficits, the paper indicates that the "Fiscal Balance Rule" is one norm for measuring whether current policy will place a larger or smaller burden on future generations than it does on current generations. The Fiscal Balance Rule is based on the economy's intertemporal budget constraint and appears to underlie actual attempts to run tight fiscal policy. It says take in net present value from each new young generation an amount equal to the flow of government consumption less interest on the difference between a) the value of the economy's capital stock and b) the present value difference between the future consumption and future labor earnings of existing older generations. While the rule is a mouth-full, one can use existing data to check whether it is being obeyed and, therefore, whether future generations are likely to be treated better or worse than current generations.
ER  -