Fiscal deficits rise within developed countries Fiscal deficits increase –Compensatory finance automatically adjusts –Additional governmental outlays and tax cuts occur But not enough to avoid sharply rising unemployment –Construction is labor intensive activity Increased indebtedness occurs as a consequence –For the US, much of the increase is external Almost 40% of public debt, half in Japan and China Short-term adjustment can translate into longer-term problem –Will foreign debt holders accept current low interest rates –Will fiscal accounts improve in time to avoid a mounting disequilibrium 12
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