Edward Conard

Top Ten New York Times Bestselling Author

  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

AI Summary. A recession would lower long-term interest rates and cut US government interest costs by roughly $500bn annually if rates fell two percentage points, but the historical recession-driven widening of the deficit of about 4% of GDP would erode government finances by an additional $1.3tn in 2025 dollars. Deliberately inducing a recession therefore cannot improve the budget deficit.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk estimates that in the event of a recession that generates a 200 bps decline in interest rates, the cost of debt service would decline by $568 billion, while lower tax receipts and higher UI payments would cost the government $1.3 trillion.

Can inducing a recession reduce the budget deficit through lower interest rates?

Core argument: A two-percentage-point decline in interest rates would save the US government around $500 billion in annual interest payments, but a recession would deteriorate government finances by about double that amount.

If the US enters a recession, long-term interest rates are likely to go down, and it would be cheaper for the US government to refinance existing government debt. However the interest payments saved if interest rates decline by two percentage points would be more than offset by the deterioration in government finances associated with a recession. Specifically, if interest rates decline by two percentage points, the US government would save around $500 billion in annual interest payments. But if the US enters a recession, the government will have lower tax collections and pay more in unemployment benefits, and the historical deepening of the budget deficit during recessions of around 4% of GDP would correspond to an additional $1.3 trillion erosion of US government finances measured in 2025 dollars. The bottom line is that it is not possible to improve the budget deficit by creating a recession because during a recession government finances would deteriorate by double the amount saved in interest payments.

Takeaways by Macro Roundup® AI

  1. A two-percentage-point decline in interest rates would save the US government around $500 billion in annual interest payments, but a recession would deteriorate government finances by about double that amount.
  2. Recessions have historically deepened the US budget deficit by around 4% of GDP, corresponding to an additional $1.3 trillion erosion of government finances in 2025 dollars through lower tax collections and higher unemployment benefits.
  3. Creating a recession cannot improve the US budget deficit, because the fiscal deterioration during a downturn exceeds the interest savings from lower long-term rates.

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