If government spends that money in a way that generates a sufficiently high rate of return, the economy will benefit. If the rate of return is below that of the private sector, however, then the rate of growth will be slower than it otherwise would have been. Contrary to what both political parties argue, there does not seem to be a strong relationship between the budget deficit and interest rates. Nor is there much reason to believe that lower interest rates, by themselves, will have a pronounced effect on investment. Moreover, focusing on the deficit can undermine sound economic policy by leading some to view higher taxes as an appropriate policy option.
Government spending is too high.
This happy consensus, however, does not translate into agreement about how to spur more savings and investment. This is the half-theory because it has so few adherents in America. In periods of economic sluggishness, Keynesians believe the government should increase spending, financed by borrowing, to give the economy a shot in the arm. This spending is supposed to stimulate aggregate demand, which causes private sector behavior to perk up. With a handful of exceptions, such as the failed 1993 stimulus bill, this approach does not receive much attention in Washington.