Deficit Reduction and Economic Growth

Most of the talk about deficit reduction has focused on the immediate effect on government programs and entitlements. But there is another dimension that so far has been ignored: borrowing effect. A reduction in deficit means that the United States will reduce her level of borrowing from the capital markets. This reduction in demand for funds could result in lower interest rate if the loanable funds theory of interest rates hold true. A reduction in interest rate can concievably lead to increase in consumption and investments. Both of these activities has the potential to increase economic growth and hence employment, and more tax revenues. So let us take a second look at the role of deficit reduction, it may not be the doomsday some of us are painting it. It could be a blessing in disguise with short-run heartburn and a long-term relief for generations to come.