3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85

Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

APPENDIX TO CHAPTER 3 Cross-Sectional Regression Analysis . . . . . 88

CHAPTER 4 Budget Analysis and Deficit Financing . . . . . . . . 91

4.1 Government Budgeting . . . . . . . . . . . . . . . . . . . . . . . . 93
The Budget Deficit in Recent Years 93
The Budget Process 94
Application: Efforts to Control the Deficit 95
Budget Policies and Deficits at the State Level 97

4.2 Measuring the Budgetary Position of the Government:

Alternative Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Real vs. Nominal 98
The Standardized Deficit 99
Cash vs. Capital Accounting 100
Static vs. Dynamic Scoring 102

4.3 Do Current Debts and Deficits Mean Anything?

A Long-Run Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Background: Present Discounted Value 103
Why Current Labels May Be Meaningless 104
Alternative Measures of Long-Run Government Budgets 105
What Does the U.S. Government Do? 109
Application: The Financial Shenanigans of 2001 112

4.4 Why Do We Care About the Governments

Fiscal Position? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Short-Run vs. Long-Run Effects of the Government on the Macroeconomy 113
Background: Savings and Economic Growth 114
The Federal Budget, Interest Rates, and Economic Growth 115
Intergenerational Equity 117

4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

ix