I remember the first time I ever saw Robert Barro. It was early 1984. He was arguing that Ronald Reagan's fiscal policies were not a structural break in American public finance, and that he saw no reason to worry that the large federal deficits of 1982 and 1983 would persist. He expected the federal debt-to-GDP ratio not to rise over 1984-1988 but rather to resume its long post-WWII decline.
[T]he recent [Reagan] deficits [of 1982 and 1983] and the near-term projections of deficits [in 1984 and 1985] reflect mainly the usual responses to recession and, in turns out, to anticipated inflation....
[T]he actual behavior of public debt through 1983... is reasonably well in line with the [standard post-WWI] experience of debt issue.... The main things that are out of line with the previous structure are projections of longer-term deficits on the order of $300 billion.... [T]here is nothing yet in the data to suggest this type of structural break... these forecasts of deficits [are best seen] as amounting to predictions that either taxes will be increased or spending will be decreased.... Notably, equation (16) implies that the planned growth of the real debt... would approach zero if the unemployment rate were to decline to about 5.5%.... [T]here is nothing in the experience of actual deficits through 1983 that conflicts in any major way with these propositions.
John Shoven as discussant attempted to introduce a little reality into the mix:
This is an interesting and thought-provoking paper.... Frankly, though, it is not at all clear that it is sucessful.... Taken literally, the theory provides strong predictions about the size of the government deficit.... The theory, of course, is not very plausible.... Does anyone really believe that the projected 1984-1988 deficits are what they are owing to tax smoothing?... [T]he empirical results of the paper do not lend support to the theory.... What have we learned after Barro's analysis? Well, not much that we did not know before.... The final conclusion of the paper... is that the current deficits... are not far off the usual pattern.... [Barro asserts] that... "normal" unemployment is... 5.4% (which is lower than the consensus)... and if 1984 unemployment comes in at 7.8% (which is higher than the consensus), and if inflation is 6.6% (again, higher than the consensus), then Barro's operation predicts a $145 billion deficit for 1984, lower than othe projections.... [Barro's belief that] the historical deficit generating process can almost account for the current deficit... requires several assumptions each shaded relative to consensus in a direction that will generate higher deficit forecasts...
Shoven was, of course, right about the future course of the debt and the deficit. And Barro was wrong: