Econintersect: The Congressional Budget Office (CBO) has studied the effects of changes in federal budget deficits on aggregate output and income. Some of the conclusions:
- Small Estimate of the effect of deficits on investment – Each additional dollar of deficit leads to a 15 cent decline in domestic investment. In particular, every additional dollar of deficit is projected to increase private saving by 61 cents and to reduce national saving by 39 cents, and every dollar’s decline in national saving is projected to lead to a 61 cent increase in the amount of foreign capital invested in the United States.
- Central Estimate of the effects of deficits on investment – Each additional dollar of deficit leads to a 33 cent decline in domestic investment. In particular, every additional dollar of deficit is projected to increase private saving by 43 cents and reduce national saving by 57 cents, and every dollar’s decline in national saving is projected to lead to a 24 cent increase in the amount of foreign capital invested in the United States.
- Large Estimate of the effect of deficits on investment – Each additional dollar of deficit leads to a 50 cent decline in domestic investment. In particular, every additional dollar of deficit is projected to increase private saving by 29 cents and reduce national saving by 71 cents, and every dollar’s decline in national saving is projected to lead to a 29 cent increase in the amount of foreign capital invested in the United States.
[click on image below to read the complete study]
Source: http://www.cbo.gov/sites/default/files/cbofiles/attachments/45140-NSPDI_workingPaper.pdf
