Is there any logic to the proposition that deficits discourage investment?

The logic of the kind of short-run economic model found in typical economics textbooks of a generation ago says that deficits discourage investment by raising interest rates ("crowding out"). Since interest rates are low now, deficits are OK--the bigger the better, in fact.

Unfortunately, economists increasingly reject this model as misleading. They focus not on the short run, but on the expected path of present and future fiscal policy. In this logic, deficits discourage investment when they cause uncertainty about the future policy changes that will be needed to reduce the deficits once the economy recovers (spending cuts? Tax increases? Exchange rate changes? etc.) This logic is very well set out in a new paper by Eric Leeper presented at the Fed's recent Jackson Hole conference. (http://www.kansascityfed.org/p...-paper.pdf)

The bottom line: The increasing polarization of Washington has increased uncertainty. Not knowing whether the future of fiscal policy will look like the Republican plans, the Democratic plans, or like neither of the above is definitely discouraging investment. We need a new way of conducting fiscal policy.

So your saying that there is now more uncertainty than in 2002, or 1994, or 1982, or any other random year? What Leeper really means by uncertainty is that the president may not roll over and do everything they want.

Uncertainty is just another word for not gonna get my way.

Oh right Mr Whose Your Nanny, zero-sum trade-offs are a myth aren't they. Free lunches are falling out of your socialist sky aren't they.

If private investment is not being crowded out then why not just have everyone work for the government until there's full employment. You probably think Ricardian Equivalence means Federal Full Employment Equilibrium don't you.

Well I have news for you Mr Nanny. Now there's empirical evidence that proves you dead wrong. A new poll shows all those seemingly unemployed people value their leisure time more than their work time when the wage rate is zero.

If they didn't, they'd be working, so either way, everytime the government spends enough to lure them away from valuable leisure time with a job, it displaces the leisure time they would have lost if hired by the private sector.

"Greenspan warned that the budget deficit was crowding out capital investment and said stimulus spending had been less successful than anticipated."

http://www.reuters.com/article/idUSTRE68E3PD20100915