© OnlineTexts.com p. 1 Chapter 13 Budget Deficits and the National Debt

© OnlineTexts.com p. 2 Budget Deficit vs. National Debt A budget deficit is the amount by which the federal government's outlays exceed its revenue in a given year. (a flow) The national debt is the federal government's total indebtedness at a moment in time. (a stock) A budget deficit is the amount by which the federal government's outlays exceed its revenue in a given year. (a flow) The national debt is the federal government's total indebtedness at a moment in time. (a stock)

© OnlineTexts.com p. 3 Budget Deficit vs. National Debt Analogy: water filling up a swim pool. –The rate at which the water is pouring out of the spigot filling up the pool is comparable with the budget deficit. –The total amount of water in the pool at any point in time is comparable with the national debt. –If spigot is turned up (deficits increase) the level of water in the pool (national debt) rises faster. Analogy: water filling up a swim pool. –The rate at which the water is pouring out of the spigot filling up the pool is comparable with the budget deficit. –The total amount of water in the pool at any point in time is comparable with the national debt. –If spigot is turned up (deficits increase) the level of water in the pool (national debt) rises faster.

© OnlineTexts.com p. 4 National Debt Held by the Public The debt held by the public excludes inter-governmental debt. The U.S. Treasury Department maintains statistics on the Public Debt to the Penny, which includes all outstanding debt. Public Debt to the Penny The debt held by the public excludes inter-governmental debt. The U.S. Treasury Department maintains statistics on the Public Debt to the Penny, which includes all outstanding debt. Public Debt to the Penny

© OnlineTexts.com p. 5 Budget Surplus A surplus occurs when government tax revenues exceed outlays. A negative surplus is a deficit.

© OnlineTexts.com p. 6 To Whom Does the Government Owe the Debt? Much of the national debt is owed to the government itself. Foreigners own about 22 percent. Savings bonds purchased by individuals account for a small fraction of the debt.

© OnlineTexts.com p. 7 Why the Debt and/or Deficit Burden May be Overstated 1.Much of the debt is owned by the U.S. government itself. –when one branch of the government runs a surplus and buys federal securities with the excess revenue, the total debt doesn't really rise except on the accounting books. 2.The deficit-to-GDP and the debt-to-GDP ratios are more accurate measures of the "true" size of the deficit. 1.Much of the debt is owned by the U.S. government itself. –when one branch of the government runs a surplus and buys federal securities with the excess revenue, the total debt doesn't really rise except on the accounting books. 2.The deficit-to-GDP and the debt-to-GDP ratios are more accurate measures of the "true" size of the deficit.

© OnlineTexts.com p. 8 The debt and deficit look less alarming when compared with the nation’s income.

© OnlineTexts.com p. 9 The debt and deficit look less alarming when compared with the nation’s income.

© OnlineTexts.com p. 10 Why the Debt and/or Deficit Burden May be Overstated 3.Many state and local governments run surpluses. 4.The accounting rules for the federal government are different than those for private businesses. –Government accounting does not depreciate capital expenditures over time. 3.Many state and local governments run surpluses. 4.The accounting rules for the federal government are different than those for private businesses. –Government accounting does not depreciate capital expenditures over time.

© OnlineTexts.com p. 11 Structural vs. Cyclical Components of the Deficit The structural deficit is the deficit that the government would have if the economy were at potential output. A cyclical deficit is the portion of the deficit attributable to the business cycle. The two parts sum to equal the total deficit: The structural deficit is the deficit that the government would have if the economy were at potential output. A cyclical deficit is the portion of the deficit attributable to the business cycle. The two parts sum to equal the total deficit:

© OnlineTexts.com p. 12 Actual vs. Structural Deficit During periods of high unemployment, actual (total) deficits exceed structural deficits. In economics booms, the reverse is true.

© OnlineTexts.com p. 13 Myths about the Deficit and Debt 1.The deficit imposes a net burden on future generations. –Countries never plan on dying. There is no reason, therefore, why our children and their children's children cannot keep passing on the debt forever. As long as income grows in proportion with the debt, the burden on future generations does not increase. –More importantly, payers and recipients of the debt are both primarily U.S. entities, so income is simply redistributed from one group to another. 1.The deficit imposes a net burden on future generations. –Countries never plan on dying. There is no reason, therefore, why our children and their children's children cannot keep passing on the debt forever. As long as income grows in proportion with the debt, the burden on future generations does not increase. –More importantly, payers and recipients of the debt are both primarily U.S. entities, so income is simply redistributed from one group to another.

© OnlineTexts.com p. 14 Myths about the Deficit and Debt 1.The deficit imposes a net burden on future generations (cont.) –There is one case where the net burden argument may hold some weight. About 22 percent of the U.S. national debt was held by foreign investors. To the extent that future generations must pay off this debt and the income leaves the country, future generations are burdened with the current generation's run-up in debt. 1.The deficit imposes a net burden on future generations (cont.) –There is one case where the net burden argument may hold some weight. About 22 percent of the U.S. national debt was held by foreign investors. To the extent that future generations must pay off this debt and the income leaves the country, future generations are burdened with the current generation's run-up in debt.

© OnlineTexts.com p. 15 Myths about the Deficit and Debt 2.The national debt will bankrupt the nation. –Huge debts have bankrupted some nations, but the U.S. is far from that scenario. –The main difference is that most U.S. debt is internally owned and the government has enormous power to raise revenue via taxation. 2.The national debt will bankrupt the nation. –Huge debts have bankrupted some nations, but the U.S. is far from that scenario. –The main difference is that most U.S. debt is internally owned and the government has enormous power to raise revenue via taxation.

© OnlineTexts.com p. 16 True Costs of the Deficit 1.Crowding out of private investment. –The government competes in the loanable funds market just like any private citizen. When it needs to borrow funds, it can drive up interest rates, crowding out--or displacing--private investment. –The lower rate of private investment reduces future rates of economic growth, slowing the rate of increase in living standards. 1.Crowding out of private investment. –The government competes in the loanable funds market just like any private citizen. When it needs to borrow funds, it can drive up interest rates, crowding out--or displacing--private investment. –The lower rate of private investment reduces future rates of economic growth, slowing the rate of increase in living standards.

© OnlineTexts.com p. 17 True Costs of the Deficit 2.Income redistribution. –If and when taxes rise to pay off some of the debt, all taxpayers must pay higher taxes, but only some U.S. entities receive the income from the debt. 3.Net burden on future generations of foreign- owned debt. –This assumes that foreigners take the income from the debt payments out of the country. 2.Income redistribution. –If and when taxes rise to pay off some of the debt, all taxpayers must pay higher taxes, but only some U.S. entities receive the income from the debt. 3.Net burden on future generations of foreign- owned debt. –This assumes that foreigners take the income from the debt payments out of the country.

© OnlineTexts.com p. 18 True Costs of the Deficit 4.Could be inflationary. –Large deficits are often the result of large amounts of government spending, which could lead to price level increases. 5.International effect. (Twin deficit problem) –Large deficits could lead to high interest rates through the crowding out effect, which in turn leads to a strong domestic currency, decreasing net exports. 4.Could be inflationary. –Large deficits are often the result of large amounts of government spending, which could lead to price level increases. 5.International effect. (Twin deficit problem) –Large deficits could lead to high interest rates through the crowding out effect, which in turn leads to a strong domestic currency, decreasing net exports.