Does the U.S. have too much public debt?  Some worry that high levels are unsustainable, yet strong investor demand for liquidity keeps interest rates low.   Public debt's liquidity services are so valuable that the government's borrowing rate r is less than the growth rate g.  The tax base grows faster than interest payments.  Since r<g, policymakers can sustain primary deficits without fiscal adjustment. However, keeping interest rates low deprives markets of valuable liquidity. There is a trade-off between labor and liquidity taxation. To quantify the importance of this trade-off, I solve for the optimal Ramsey policy of a government that issues safe assets (i.e., risk-free and liquid), taxes labor, and insures against aggregate risk. Introducing quantitatively realistic liquidity demand into an otherwise standard optimal debt model dampens policymakers' tax-smoothing and precautionary savings motives. Calibrating my quantitative model to U.S. data, I find that recent crises were overly debt-financed. While debt expansion was the optimal response to these crises, primary deficits were too high. The over-reliance on debt financing pushed the debt-to-GDP ratio 10% above optimum. Given the projected path of government expenditure, the model suggests that, over the next 10 years, policymakers should reduce the debt to 75% of GDP. As extensions of the baseline model, I consider the optimal debt policy during liquidity and default crises.

How does government spending affect the macroeconomy?    We provide a new monthly series of government spending shocks, spanning 1960-2023.  Using high-frequency data on U.S. defense contractors' stock returns and exploiting institutional features of the federal budget process, we identify important fiscal policy events. By assuming defense spending news is revealed in daily windows around these events, we identify defense news shocks.  Our shock series matches historical fluctuations in defense spending.  The shocks have statistically and economically significant effects on aggregate activity.  Positive defense news shocks lead to large increases in defense spending, consumption, income, and output.  We estimate a fiscal multiplier of 2.0.   We test for asymmetric fiscal multipliers and find that multipliers are largest when (i) there is slack in the economy (ii) monetary policy is accommodative (iii) recessions are demand-driven (iv) government spending is declining, and, (v) spending growth is small.