deficit and the difference between the current and capital expenditures of the government. As far as the inflation issue is concerned, Eisner argues that one should imagine a government with a total debt of a trillion dollars, paying 4 percent on the debt, so that its total interest bill is $40 billion. Eisner then raises the question of whether the government really does the economy any more harm in the second case than in the first. He maintains that the government itself does not consume any more goods and services. Nor does the larger deficit encourage higher consumption. Supposedly owners of government bonds all understand that the higher interest rate they receive is offset by the erosion in the value of the bonds by inflation, so they will not feel richer. Thus the larger deficit in the second case will not lead to a higher consumption by either the public or private sector. And since national saving is simply income less consumption, the higher measured deficit will not have a negative effect on national saving.[2]
Eisner's other major point is that a good chunk of government spending is investment, not consumption: building roads, aircraft carriers, and other long-lived assets. He believes that one should not count this as part of the government's current expenditure any more than a firm's investment spending is counted against its profits. Thus, Eisner concludes that the U.S. does not have any deficit problem if it is measured correctly. In addition, he believes that the really damaging problem is not the deficit but the attack on the deficit, which distorts public priorities.[3]
On the right, individuals such as Robert Barro, from Harvard, also appear to argue that the size of the deficit is irrelevant. Using Barro's reasoning, one could suppose that the Federal government were to announce that it was reducing everyone's taxes this year, that it would cover the revenue loss by selling one-year bonds, and th...