DeficitsSurplusesPublic Debt Deficits, Surpluses and the Public Debt

National Debt Clock 8 $24,000 National Debt Clock $8.5 $39,172 National Debt 12 $50,000 per second is added to the National Debt 3 9, and $3 mil per minute and $3 mil per minute. or $3.8 Billion per day $156,688

National Debt $12 trillion is enough to: Give every 18-year-old a 4-year -Give every 18-year-old a 4-year college education for the next 57 years. college education for the next 57 years. But Congress is too smart to spend our money that way. Paying for wars and tax brakes for the rich makes more sense. We are all guilty of a little debt. Usually around Christmas we stimulate the economy by over spending. But there is a way to avoid this seasonal debt.

How To Save Money At Christmas Santa Claus

The Public Debt Since 1970 Are Republicans concerned with the debt? They are the main reason for our national debt. On 16 March, 2006 Congress raised the debt ceiling to 9 trillion. President Bush signed it on 20 March, Well at least it wasn’t one zillion dollars.

DEFICITS AND SURPLUSES Source: Economic Report of the President, 2001 $ Actual $412 in 2004) Projected In 1993 Congress passed the Deficit Reduction Act, designed to increase taxes over 5 years and reduce Federal spending. It was estimated that by 2004 we would have a 412 billion surplus.

$412 The Republicans gained control of Congress in 1996, and pledged in their “Contract with America” to eliminate budget deficits by But they lowered taxes and increased spending so that by 2004 we had a 412 billion deficit.

Public debt – is the total accumulation of each years deficits (minus surpluses) the Federal government has incurred through time. It represents the total amount of money owed by the Federal government to the holders of U.S. securities (bonds).

War; during wars government expenditures increase. Three options are available to finance the spending: -Increase taxes, which would hurt the incentive to work. -Print money, which would cause high inflation. -Borrow the funds Recessions; when national incomes decline, tax revenues decline. Tax Cuts; tax cuts account for much of the growing debt since 1980, and Congress failed to cut spending. Factors that cause public debt

Some economists argue that the debt although big is nothing to worry about. Debt & GDP; a wealthy, highly productive nation can incur and carry a large public debt more easily than a poor nation can. It is more meaningful to measure the national debt in relation to our GDP. Don’t Worry Be Happy!

Japan Italy Belgium Canada France Spain Sweden Germany United States Netherlands United Kingdom Finland Denmark Australia Although the U.S. has the world’s largest public debt, a number of other nations have larger debts as percentage of their GDPs. Source: Organization for Economic Cooperation and Development

, % 37% 39,

Interest Charges; the primary burden of the debt is the annual interest charged on the debt. This interest must be paid each year and thus leaks budgetary funds that could go to other programs. Interest payments are now the fourth- largest item in the Federal budget. However, since most of the debt is owed to Americans, that interest goes to us, and is consumed. Don’t Worry Be Happy!

PUBLIC DEBT OWNERSHIP, % 26% 11% 25% 11% 17% Debt held By Federal Reserve & Government Agencies Debt held Outside the Federal Reserve & Government Agencies Federal Reserve U.S. Government Agencies Other, Including State & Local Governments U.S. Banks & Financial Institutions Foreign Ownership U.S. Individuals Foreigners hold $3.5 Tril. Japan-$751 B, China-$799 B, Britain-$249 B, OPEC-$185 B, S. Korea-$39 B, H. Kong –$132 B, Taiwan-$78 B, Mexico-$22 B, Thailand-$30 B, & India-$36 B. China holds 23% of our foreign debt

False Concerns about the debt Bankruptcy; the Federal government will not go bankrupt for two good reasons. Refinancing; the government refinances the debt by selling new bonds to pay off maturing bonds. Taxation; the government can increase taxes to pay interest payments or the principle of the public debt. Businesses and individuals do not have this power.

False Concerns about the debt Burdening Future Generations; the debt is not a future burden. Since 78% of the debt is owned by American citizens, it is a liability to Americans (as taxpayers) and an asset to Americans (as investors). By paying off the debt we would just be transferring money from Americans to Americans. Only the foreign owned portion of the debt would negatively impact U.S. purchasing power.

Real Concerns about the debt. Income distribution; most of the ownership of the public debt in concentrated among the wealthier groups who are the citizens that buy stocks and bonds. Thus paying off the debt would transfer income from lower income taxpayers to higher income people, increasing the nation’s income inequalities.

Real Concerns about the debt. Incentives; a large debt may hurt economic growth; because as the debt grows, the interest paid on it will grow. So taxes must increase to pay that interest. Higher taxes will hurt the incentive to innovate, invest, and work.

Real Concerns about the debt. Foreign-Owned Public Debt; interest payments to debt owners outside the U.S. enables foreigners to buy some of our economic output. Thus the U.S. transfers goods and services to foreign lenders.

DIDIDIDI Investment (billions of dollars) Real interest rate (%) Real Concerns about the Debt CrowdingOutEffect AS AD2 AD1 4%2%4%2% Y IGIGIGIG A large public debt results in higher interest rates, which reduce I g. When crowding- out is extensive, future generations will inherit smaller production capacity and standard of living.

I D1 Investment (billions of dollars) Real interest rate (%) I D2 AS AD 1 AD 2 YRYRYRYR Y*Y*Y*Y* G But if government uses part of the debt spending for public investments (highways, electric dames, etc.) and human capital (education, training) than those public investments will increase the economy’s future production capacity. And this would negate the crowding-out effect

Three Budget Philosophies Annually Balanced Budget – each time the earth orbits the sun we should balance the budget. This would put the government in an economic straitjacket; because it could not fight recessions with deficit spending. This would be like pouring water on a drowning man. Balancing the budget during a recession by increasing taxes would worsen the recession. Running a surplus during boom times and giving the money back would be inflationary. “Earth Orbits Sun” “G”

AD 1 Balancing the Budget – during Recession [Increase T or Decrease G - Procyclical AS PL 1 PL 2 YRYRYRYR Y*Y*Y*Y* PL 3 YRYRYRYR So, the fiscal actions to balance the budget decreases decreases, rather than increases AD increases AD, and is procyclicalcounter procyclical, not counter. AD 3 AD 2 Cut

AD 1 Balancing the Budget - during Inflation [Decrease T or Increase G - Procyclical ] AS PL 1 PL 3 Y*Y*Y*Y* YIYIYIYI YIYIYIYI PL 2 So, the fiscal actions to balance the budget increase increase, rather decrease AD than decrease AD, procyclical & is also procyclical, counte rather than counter. AD 3 AD 2

Recession “Tax cut” Inflation “Raise taxes” Cyclically Balanced Budget – run deficits during recessions & surpluses during expansions so the budget is balanced not each year but over the course of the business cycle. The government could conduct counter-cyclical fiscal policy and balance its budget over a period of years. The main problem is that fluctuations are not symmetrical enough to ensure that the surplus will pay off the deficit. “Deficit Spending” “Balanced” TaxCuts RaiseTaxes

Functional Finance – balance the economy not the budget. The annual or cyclically balanced budget is of secondary importance. The important thing is to provide for non-inflationary, FE & ensure the economy produces its potential GDP. If there are chronic deficits or surpluses, so be it. Deficits are minor problems, compared to inflation or recessions. U.S.Economy

Terrorist Lose! Memorial dominates AP Economics